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Chrysler-Benz talk deal
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May 6, 1998: 7:53 p.m. ET
Sources say merger may be announced as early as Thursday
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NEW YORK (CNNfn) - Chrysler Corp. and Germany's Daimler-Benz AG dropped a bombshell Wednesday by announcing the two companies were in merger talks.
The move, the latest in a series of blockbuster merger announcements to hit the market this year, would be the biggest industrial deal of all time and create the world's fifth-largest auto maker.
It also would radically change the global landscape for the auto industry, partnering Germany's biggest industrial firm with the smallest of Detroit's Big Three.
According to sources familiar with the discussions, the deal would involve a stock for stock transaction that would value Chrysler at between $55 and $60 a share, putting the value of the deal at between $35 billion and $39 billion. Sources say directors from both companies were meeting Wednesday and a deal could be announced as early as Thursday morning.
While many details still need to be ironed out, a deal between Daimler -- maker of the luxury Mercedes line of cars -- and Chrysler, which is almost as famous for its brushes with bankruptcy as it is minivans, would be the largest cross-border merger in history. It would also be on par with other megamergers announced this year such as the Citicorp-Travelers Group Inc. deal and the BankAmerica Corp./ NationsBank Corp. merger.
News of the merger talks sent Chrysler shares soaring 7-1/4 to 48-11/16 and pushed Daimler shares to 108-9/16, up 6-1/2.
Craig Abbott, an analyst at Robert Fleming Securities in Germany, said the deal would allow both companies to expand in each other's domestic market. (196K WAV) or (196K AIFF).
Chrysler would gain a foothold in Europe
Chrysler, based in the Detroit suburb of Auburn Hills, Mich., has been trying to expand its presence in Europe for years, while Daimler, based in Stuttgart, Germany has been looking to increase its share of the U.S. market.
In a joint statement, the car makers said they are discussing "a possible business combination of the two companies involving a stock transaction in which stockholders of both companies would become stockholders of a new company."
The companies were careful to note that an agreement has not yet been signed. A deal could involve a merger between the two or a buyout of Chrysler by Daimler, which is larger in terms of revenue.
Robots turning metal into a minivan
News of the talks was first reported Wednesday by the Wall Street Journal.
Sources said the new company would have two chairmen and chief executive officers -- Robert Eaton of Chrysler and Juergen Schrempp of Daimler. The company would also continue to have headquarters in Germany and Michigan.
"It wouldn't be a German company and it wouldn't be an American company," one source said.
The combined company would have an estimated $130 billion in annual revenue, still below automotive titans Ford Motor Co. and General Motors Corp., Chrysler's two U.S. rivals, placing it just behind Germany's Volkswagen AG as the fifth-largest auto maker in the world.
Had the two companies been combined last year, a Chrysler-Daimler would have sold about 3.6 million cars and trucks worldwide.
Analysts, who said a Chrysler-Daimler deal looks good "on paper" despite their different cultures, said it also could pose a challenge to GM and Ford in the U.S. and may lead to a wave of buyouts, said Schroder & Co. analyst John Casesa.(199K WAV) or (199K AIFF).
While other industries, such as financial services, technology and media have experienced a wave of consolidation in the last few years, the auto industry has yet to attract multi-billion dollar deals.
However, as global market pressures accelerate, experts say automakers in Europe, Japan and the United States will no doubt need to form alliances in order to compete.
"They're all up for grabs," said David Littman, an auto economist at Comerica Bank. "Either to improve the focus, the quality of the products to penetrate the Asian markets or the Latin markets, they're all up for play.
"There does seem to be a value for shareholders long-term through consolidation, the same kinds of consolidations that have improved the supplier industry and the banking industry," he added.
David Healy, an analyst with Burnham Securities, said the proposed deal points to a change of heart at Chrysler about global expansion.
"They must have recognized the difficulty of growing internationally without a partner, and that having an international presence outside of North America was a lot more than they had acknowledged" in importance, Healy said.
The United Auto Workers Union said it is monitoring developments between the two companies.
"Naturally, we are paying close attention to the impact on our members of any new business relationship between Chrysler and Daimler-Benz," UAW President Stephen Yokich said in a statement.
"Our members at Chrysler have made extraordinary contributions to Chrysler's success over the years, and we have every right and every intention of protecting their interests in the event that Chrysler undergoes any structural change," he added.
Chrysler's cash crunch forced a retreat
Chrysler all but abandoned Europe in the late 1970s when financial difficulties forced the company to retreat. With the company struggling to meet its payroll and losses piling up, Chrysler managed to persuade the Carter administration to provide $1.5 billion in federal loan guarantees.
The money gave Chrysler a fresh start, which the company used to launch a new line called the K-car. The cars quickly became a hit with consumers and, within a few years, Chrysler was healthy again.
In 1990, when the company was floundering once again, then-chairman Lee Iacocca tried to strike a deal with Italian carmaker Fiat, but Fiat executives backed away after reviewing Chrysler's books.
Forced to go it alone, Chrysler spent billions of dollars to upgrade its minivans and Jeep vehicles, which it acquired when it bought American Motors Corp. in 1987 from France's state-owned Renault for $1.1 billion in cash and stock. That move proved to be a stoke of genius, as American car buyers' tastes shifted away from passenger cars and more toward sport/utility vehicles.
By the mid-1990's Chrysler was the most profitable car company in the world.
Kirk Kerkorian eyes Chrysler
In 1991, Chrysler's newfound fame grabbed the attention of billionaire investor Kirk Kerkorian.
Kerkorian, who made his fortune in the movie business, launched a $23 billion hostile takeover bid for Chrysler in 1994 with the help of Iacocca. However, the bid fell apart after Kerkorian ran into trouble with the financing.
Kerkorian, who owns about 13.7 percent of Chrysler, was not available to comment on the proposed Daimler deal.
Industry analysts said a merger between Chrysler and Daimler faces numerous obstacles, including a clash of cultures, between an orderly and hierarchical structure at Daimler and Chrysler's more democratic decision-making.
"If there's going to be a rough spot, it's that Chrysler has driven its decision-making from the lowest levels," said Mike Flynn, associate director of the University of Michigan's Office of the Study of Transportation.
Experts said they don't expect many layoffs if the deal goes through because Chrysler and Daimler have very little overlap. Most of Chrysler's assembly plants are located in the United States and Daimler's sole U.S. factory is in Tuscaloosa, Ala.
"There is fairly little overlap between Chrysler and Mercedes," said Csaba Csere, of Car and Driver Magazine. "In the U.S, Chrysler's product line pretty much tops out at $30,000. That's where Mercedes begins. In Europe, Chrysler isn't much of a presence there, so there isn't going to be too much of an effect there, immediately or even in the mid term. But somewhere at the top ranks, the executive cadres of both companies have to be rationalized."
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