NEW YORK (CNNfn) - Heralding a new era for industry worldwide, Daimler-Benz AG Thursday said it will merge with Chrysler Corp. in a $38 billion deal.
The combined entity -- which will be called DaimlerChrysler AG -- will compete in virtually every segment of the market, offering everything from $11,000 subcompacts to $100,000 Mercedes sedans.
"This is much more than a merger," said Juergen Schrempp, the strong-willed Daimler-Benz's chairman who took an idea of a merger to Robert Eaton, Chrysler chairman and chief executive officer, last January.
"Today we are creating the world's leading automotive company for the 21st century. We are combining the two most innovative car companies in the world," he said.
For Chrysler, the deal means entry to the all-important European market, where the Detroit-based car maker has been living in the shadows of its crosstown rivals, General Motors Corp. (GM) and Ford Motor Co. (F).
For Daimler-Benz, the merger provides a second brand of moderately priced cars and trucks and paves the way for the German auto giant to expand in the United States.
The deal is expected to close by the end of the year.
An odd couple or a perfect fit?
At first, the pairing of the scrappy Chrysler, considered by many to be an American success story with Daimler-Benz, the stodgy German industrial giant may seem strange. But Schrempp said the merger makes for a "perfect fit". (327K WAV) or (327 AIFF)
"This merger of equals will catapult DaimlerChrysler into the industry's top three in market capitalization with an equally strong credit position," Eaton told reporters at a news conference in London. "By realizing the synergies, and with our combined strengths we believe that we are ideally situated for growth in the marketplace as we go forward."
Juergen Schrempp Robert Eaton
Eaton also said his willingness to partner Chrysler with Daimler-Benz stemmed from his view consolidation may soon break wide open in the auto business. (302K WAV) or (302K AIFF)
Eaton and Schrempp, 53, will be share the posts of chairman and CEO at DaimlerChrysler for three years, after which Eaton, 58, plans to retire.
Amid the jubilation from executives, unions and regulators and the United States began to line up Thursday to take a stance on the deal. Sources said Germany's antitrust authorities are unlikely to raise objections to the deal.
However, the U.S. government is expected to scrutinize the deal carefully.
The United Auto Workers Union, which represents 66,000 Chrysler workers, offered preliminary support for the deal, but said it is reviewing the merger to make sure American jobs are protected.
"We're going to take a hard, good look at it," said UAW President Stephen Yokich, adding it should take the union about 90 days to iron out its position.
The move, the latest of many blockbuster mergers sweeping the globe this year, is the biggest industrial deal of all time and creates the world's fifth-largest automaker.
Auto analysts said the deal is likely to spur other mergers in the auto industry as rivals seek to form alliances.
"This represents a wave of consolidation in the automotive industry," Stephen Haggerty, analyst at Schroder Securities. "Over the last 10 years assemblers have worked with suppliers to reduce costs. What we're going to see now, for the next 10 years, is consolidation to take out capacity, reduce the pricing pressure in the market that's being caused by the tremendous burden of excess capacity around the world."
As if to underscore the point, Vickers Plc Thursday announced it agreed to sell its famed Rolls Royce luxury car company to Volkswagen AG for $705 million. VW snatched Rolls Royce away from rival German automaker BMW.
Under terms of the deal:
- Daimler-Benz shareholders receive one share of the new company for every share they currently own
- Chrysler shareholders receive 0.547 of the new company's shares for every Chrysler share they own.
- At current market prices, the deal values Chrysler at nearly $58 a share, up from Wednesday's closing price of 48-11/16.
- If Daimler shareholders approve a special dividend, as expected, the ratio would rise to 0.62 Daimler share for every Chrysler share. That would leave Chrysler shareholders with 43 percent of the combined company.
- The companies expect to realize cost savings of $1.4 billion in the first year after the merger and $3 billion in savings over the next several years.
- Executives said no layoffs or plant closings are planned.
- The company will have headquarters in Germany and Michigan but it will be incorporated in Germany and have a traditional German structure with separate supervisory and management boards.
- The combined company would have $92 billion in market value and an estimated $130 billion in annual revenue, still below Chrysler's two U.S. rivals, Ford Motor Co. and General Motors Corp., and just behind Japan's Toyota Motor Corp. and Germany's Volkswagen AG as the fifth-largest automaker in the world.
On Thursday Chrysler shares [C] were up 4-11/16 to 53-1/2, while Daimler-Benz' American Depositary Receipts [DAI] which have climbed 49 percent in Wall Street trading this year, slipped 2-3/16 to 106-3/8.
(Click here for a five-year chart of Chrysler shares)
(Click here for a five-year chart of Daimler-Benz shares)
Europe a beachhead, and merger-hungry
Chrysler, based in the Detroit suburb of Auburn Hills, Mich., had for years been trying to expand its presence in Europe. Daimler, of Stuttgart, Germany, also has been looking to increase its share of the lucrative U.S. market and expand its lineup of vehicles to more moderately priced offerings.
Chrysler's Eaton said the two brands -- Mercedes and Chrysler -- would remain distinct after the merger.
"We believe very strongly that a brand is the most important thing a company owns and I can assure you we will do nothing but improve those brands, and year, they will clearly be separate brands forever."
Chrysler sells cars and trucks through its Plymouth, Chrysler, Dodge and Jeep brands. However, the bulk of the company's sales come from minivans, trucks and so-called sport utility vehicles. Mercedes' lineup consists mostly of cars, but the company recently started building sport utility vehicles in Alabama.
Homecoming for Chrysler
Chrysler all but abandoned Europe in the late 1970s when financial woes forced it to retreat. Struggling to meet payroll and losses piling up, Chrysler persuaded the Carter administration to provide $1.5 billion in federal loan guarantees.
Chrysler was no neophyte to merger talk. In 1990, when again floundering, 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 stroke of genius as American car buyers' tastes shifted away from passenger cars and more toward sport/utility vehicles.
By the mid-1990s, Chrysler was the most profitable car company in the world.
Kirk Kerkorian eyes Chrysler
In 1990, Chrysler's new fame grabbed the attention of billionaire investor Kirk Kerkorian - who four years later mounted a $23 billion hostile bid of his own for the auto maker.
That bid fell apart after Kerkorian ran into trouble with the financing.
Kerkorian's Tracinda Corp., today Chrysler's largest shareholder with about 13.8 percent of the company, said in a statement on Thursday it is behind the DaimlerChrysler deal.
"As Chrysler's largest shareholder, Tracinda supports Chrysler's bold initiative to build on its strong domestic position and stay ahead of the curve in an industry poised for global consolidation," Tracinda said. "We believe the combination of Chrysler and Daimler-Benz can create substantial shareholder value."