• Rumors that Mercedes Set to Acquire Daimler: Be Skeptical

Rumors that Mercedes Set to Acquire Daimler: Be Skeptical
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When you are asked by someone that owns part of your company to help with his or her hobby, you probably don’t feel inclined to say no.

That’s the position of Daimler, AG in dealing with Aston Martin, which is owned in substantial part by the investment arm of Kuwait. Kuwait also happens to own seven percent of the stock of Daimler, AG.

The hot rumor circulating this week-end has Mercedes-Benz – that would actually be Daimler – buying Aston-Martin, or at least a big stake in it. AutoBlog even purports to specify particulars of the deal: in exchange for Daimler buying a stake in Aston, the Kuwaiti Investment Authority would receive a seven percent interest in Daimler. (So, would that be another “seven percent”? Or is it possible that the AutoBlog j is confusing this with the seven percent in Daimler that Kuwait already owns?)

Aston is the manufacturer of 7,000 cars a year. If it reaches its goal, it’s going to build 9,000 per year.

Daimler built 39,000 buses last year. In other words, just counting buses, Daimler’s production was four times that of Aston. Daimler sold 1.28 million automobiles last year.

Aston isn’t worth seven percent of Daimler. Not even close.

(more after the jump)

On the other hand, swapping Aston for Daimler stock at any reasonable level doesn’t seem like such a good deal for the investors in Aston. They could actually make a lot of money holding onto Aston.

Thanks to Ford.

Aston-Martin benefited greatly from its Ford ownership: Ford rebuilt the company, graciously providing entirely new production and engineering facilities, as well as new plant and equipment, before selling the company at a loss. At the time, one prominent auto analyst for a financially-oriented magazine publicly said that he thought selling Aston was a big mistake, that Ford had finally gotten it to the point where it could become profitable and that selling it would merely allow the buyer to reap all of the benefits of that investment. Subsequent events suggest that he was correct. Aston sales have increased dramatically since its new owners took control.

That doesn’t mean that there won’t be a link between Daimler and Aston-Martin. Daimler officials have visited Kuwait. Aston executives have visited Daimler’s headquarters. Some sharing of technology between Aston and Daimler has been rumored for months. Kuwait owns the largest single block of Daimler stock, almost twice that of the next largest shareholder, the Deutsche Bank.

Given the influence which Kuwait’s stake in Daimler gives it, it would be logical to expect it to look to Daimler for technical assistance. Though Aston’s chairman, David Richards, gave an interview last month in which he expressed confidence that Aston could internally fund new models as needed, the company will be at a clear disadvantage to larger manufacturers as new and tighter CO2 and emissions regulations come into effect, particularly in Western Europe. That is an investment that Aston can afford – after all, it’s largely owned by Kuwaiti interests. But, it’s also an investment it likely cannot make and be profitable. Aston can, therefore, be expected to look first to Daimler for assistance in meeting these regulations. That would be to Aston’s advantage, and in the sense that it provides some offset to Daimler’s investment costs, also to the advantage of Daimler.

Aston-Martin produces its own engines. These are engines, however, that are probably nearing the end of their product cycle, in large part because of the difficulty of adapting them to upcoming regulations.

BMW, among other car makers, has fully established that premium car buyers do not necessarily care who makes the engine in the car. Rolls-Royces are powered by BMW engines. Similarly, Bentley uses a VW developed engine in most of its models. While it is unlikely that a Ferrari buyer would take kindly to the notion of a Ferrari with an outsourced engine, the same isn’t necessarily true of Aston-Martin. The brand’s identity, while oriented toward performance, is more identified with a fictional spy than with manufacture of its drivetrain.

Daimler could well benefit from sharing drivetrains with Aston. While the supercar market isn’t high volume, it is high profit. In the parlance of casinos, “whales” are those who can win or lose $3 million in one stay at the casino hotel. In the top tier Las Vegas casinos, whales constitute a proportional handful of the gamblers, but account for as much as 80% of the income. Though the benefits from selling cars priced to appeal to automotive whales aren’t as dramatic, it’s a lucrative segment of the market, even though a small one.

Ralph Kalal
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