Buy high, sell low: The Chrysler deal closes
The deal for Cerberus Financial (named after the three-headed dog of Greek mythology) to buy 80% of Chrysler closed today, with the former DaimlerChrysler renaming itself Daimler, A.G. and keeping 20% of Chrysler. The new independent Chrysler will be named Chrysler Holding L.L.C., the last the initials indicating that it is technically a limited liability company, not a corporation. The auto operation will be named Chrysler, L.L.C.
The closing had been postponed because the consortium of large New York investment banks who had agreed to manage the debt offering needed to fund the deal turned out to be unable to place more than half of that debt offering with private investors. In the end, the banks had to take on over $10 billion of the debt themselves.
As was predicted at TopSpeed previously, Daimler ended up accommodating Cerberus to make the deal work. Daimler is apparently itself accepting over $1.5 billion of the riskiest of the unplaced Chrysler loans, so-called “second lien” loans (secured by, in essence, second mortgages on plant and equipment) though it will be able to sell those loans, at least in theory, after a year. The effect is much the same as a home seller funding the down payment for a buyer and then taking a second mortgage back for its repayment.
Chrysler shares closed at just under $90.00 per share on the New York Stock Exchange, down slightly for the day, but up 45% for the year. At least investors are happy to see Daimler gone.
In the end, however, the future remains problematic for Chrysler. Though free of Daimler and with a fresh infusion of cash in its hands, Chrysler’s management may not have the freedom to make long term decisions for which it was probably hoping. The banking consortium will still be looking to sell the loans which they’ve been obliged to fund internally. They will be pressing Cererbus to make sure Chrysler does what it takes to make those loans attractive. Meantime, the chance that Chrysler can get additional funding, should it need it, appears remote. Whether the money which Cerberus is injecting into Chrysler and Chrysler Financial is enough to give the company breathing room and finance new products that can be sold at a profit is still very much an open question. The financial markets are clearly skeptical that Cerberus can make money where Daimler failed to do so.
In the end, you have to wonder about the talent and intellect of those who made the original deal for Daimler-Benz to buy Chrysler. At the time, it was billed as a synergy of companies as the fashionable thinking decreed that automakers must combine to create a world-wide dominance in automotive markets. Daimler’s management, however, always seemed to regard Chrysler as a poor relative, like a cousin you don’t really want the outside world to think is related to you. They kept technology from Chrysler, while also failing to make the investment in new product required by its markets. Worst, Daimler management so focused on quarterly results at Chrysler that its management was forced to make decisions that would satisfy the Daimler bosses, such as overproducing minivans the year before a new one would be introduced and flooding dealer lots in 2006 with cars dealers could not sell (and many of which they’ve still not sold).
Daimler paid $36 billion for Chrysler in 1998.
In 2007, a mere nine years later, it gave the company away and paid for the privilege of getting rid of it.
Buy high. Sell low.
Maybe investors should be more optimistic about Chrysler’s chances under Cerberus.
It is difficult to believe that anyone could do worse at running the company than the automotive solons at Daimler.