Le Lu

MSF, Cohort 2
Clark University
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Case Study in Corporate Finance
Chrysler Corporation
Negotiations between Daimler & Chrysler

- Le Lu












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Le Lu
MSF, Cohort 2
Clark University
2 / 6

Case Study in Corporate Finance
Chrysler Corporation: Negotiations between Daimler & Chrysler

PART I
The strengths and weaknesses of each company Chrysler and Daimler
Chrysler Daimler
W
e
a
k
n
e
s
s
e
s

Lack of product diversification (lack of
mid-size vehicles), Chrysler focused heavily on
trucks and SUVs. In 1997, trucks, including
minivans, accounted for about 2/3 of
Chryslers vehicle sales in United States.
International strategy focused on Latin
America, but was completely Absent from
Europe market for many years. Chryslers
overall market share in Europe was only 0.7
percent in 1997
1
. (lack of car models for the
Europe market.)
Lack of attention to detail in manufacturing
and brand image.
Overdiversification (1980s) made Daimler
unfocused and inefficient, resulting in a huge
loss of $3.3 billion in 1993.
High cost and Inefficient product model.
Daimler!s R&D cost is about four times that of
Chrysler and it takes about 60-80 hours to
build a Mercedes, while it only takes about 20
hours to make a Japanese cars.
2

Expensive labor cost(the worlds highest) and
strong bargain power of the labor unions.
Strong Japanese competitors, who
introduced a series of luxury cars, such as
Lexus, Acura, and Infiniti that comparable to
Mercedes but cost much less.
S
t
r
e
n
g
t
h
s

low cost car producer with high profit
margin
Dominate in minivan segment (Doge
Caravan/Plymouth Voyager is the worlds
most successful minivan)
Efficient in product development (Short cycle
of concept-to-market) and Low development
cost, which contributed to platform teams.
Good supplier relations. Suppliers were
offered the long term contract, were involved
in the design process, and were encouraged
to make cost-saving suggestion (SCORE).
3

The brand name of Mercedes, A symbol of
top-quality and luxury.
A global distribution and production net
work .
Reasonable product line (E-class, C-class,
S-class etc) and successful new models
introduced.
Strong technology and quality control

From the table above, we notice that, on regional basis, Chrysler are strong in US
with strong European-thinking and Daimler are strong in Europe with strong
American-thinking, and we notice that, on product basis, Chrysler focused on sport
utility vehicles, pickup trucks, and low-priced cars, while Daimler produced
high-priced luxury cars. Actually, on many aspects, they are well complementary.
Therefore, we can conclude that because there was little overlap between the two
companies, this deal SEEMS TO BE a good fit.

1
P605-Chryalers international strategy
2
P603 & P605
3
P603-Chryslers product Development and Manufacturing Stragety
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Le Lu
MSF, Cohort 2
Clark University
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PART II
The high and low values of Chrysler and of Daimler-Benz

1. DCF Approach

FCF
Chrysler Daimler
1998 1999 2000 2001 2002 1998 1999 2000 2001 2002
NOPAT 3655 3863 4085 4319 4568 2785 3331 3869 4387 4915
Deprec. 3195 3406 3631 3870 4122 3770 3804 3906 4047 4247
in Net Working
Capital
-2676 182 193 204 217 724 795 874 955 1044
Capital
Expenditure
4000 4240 4495 4764 5050 4365 4796 5271 5760 6296
FCF
4
5526 2847 3028 3221 3423 1466 1544 1630 1719 1862




2. Multiple Approach


4
FCF=NOPAT +Deprec - Incr. OWC - Capex
4

5
Terminal Value =Final Projected Year Cash Flow (1+Long-Term Cash Flow Growth Rate)
(Discount Rate ! Long-Term Cash Flow Growth Rate)
6
Based on Daimlers performance in 1997, I estimate a growth rate of 6.5%for perpetuity
Terminal
Value
5

Chrysler Daimler
3423*(1+3%)/ (9.2%-3%) =56866 1862*(1+6.5%
6
)/(8.7%-6.5%)=90137.7
Equity Value Chrysler Daimler
1998 1999 2000 2001 2002 1998 1999 2000 2001 2002
FCF 5526 2847 3028 3221 3423 1466 1544 1630 1719 1862
TV (Perpetuity) 56866 90137.7
Discount Factors 0.916 0.839 0.768 0.703 0.644 0.920 0.846 0.779 0.716 0.659
Present Value

5062 2389 2325.5 2264.4 38826 1349 1306 1270 1231 60627.8
Firm Value 50866.4 60627.8
Current debt
outstanding
15485.0 22330.7
Fair value of
Equity
35381.4 38297.1
Current shares
outstanding
648 517
Equity value per
share
$54.60 $74.08
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Le Lu
MSF, Cohort 2
Clark University
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Chrysler
PE Multiple PS Multiple
7
Price/CF Multiple Market/Book value multiple
Ford Motor 7.0 0.292 3.1 1.51
GM 8.6 0.299 3.0 2.67
Chrysler 8.1 0.432 4.8 2.33
Navistar 11.7 0.346 9.1 2.83
US Average 8.86 0.342 5.03 2.33
EPS
8
5.01 / / /
Sales/ Share / 108.35
9
/ /
CF/ Share / / 10.5 /
BV/ Share / / / 16.82
Implied Value $44.39 $37.06 $52.82 $39.19


Daimler
PE Multiple PS Multiple
10
Price/CF Multiple Market/Book value multiple
Daimler 26.6 0.747 8.7 2.69
Volvo 12.3 0.518 9.1 1.59
BMW 24.8 / 3.6 3.59
Peuqeot 18.0 / 2.6 0.82
Fiat 16.6 / 2.9 1.35
Audi 11.6 / 2.7 2.93
Renault 13.3 / 4.3 1.16
Adjusted EUR
Average
21.23 0.633 7.13 2.62
EPS
11
3.75 / / /
Sales/ Share / 144.40 / /
CF/ Share / / 11.80 /
BV/ Share / / / 68.03
Implied Value $80.0 $91.41 $84.17 $178.24

3. Summery: High value and Low value of Chrysler & Daimler

Chrysler Daimler
High Value $54.60 $178.24
Low Value $37.06 $74.08




7
Price/Sales per share
8
EXHIBIT 13, 1998E EPS
9
EXHIBIT 11, Value Line Report on Chrysler
10
Price/Sales per share
11
EXHIBIT 13, 1998E EPS
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MSF, Cohort 2
Clark University
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PART III
The key value drivers

Value drivers are the characteristics likely to either reduce the risk associated with
owning the business or enhance the prospect that the business will grow significantly
in the future.
Familiar value drivers include proprietary technologies, market position, brand names,
diverse product lines and patented products. Some less-obvious value drivers you may
not have considered are operating systems capable of improving or sustaining cash
flows,well-maintained facilities, effective financial controls and fraud-prevention
initiatives.
Key value drivers vary by individual company, industry and the particular needs of
buyers.
12


Chrysler Daimler


Key Value Drivers
High profit margin
Dominate in minivan market
Efficient in product development
(Platform team)
Good supplier relations
(SCORE)
Famous Mercedes Brand
High-end market
Global distribution and production
net work
Diversified product line
High technology and quality


PART IV
The risks to Chrysler and to Daimler in this transaction

1. No significant Synergies
It was claimed that the merger would generate an annual synergy of about $1.4
billion in 1998 and $3.0 billion starting in 1999, and that the merger would not cause
any layoffs or plant closings. Thats too optimistic. Maybe this is not the case, synergy
can only be achieved when two companies can produce and distribute their wares
more efficiently than when they were apart, but I dont think these two companies
with totally different culture and different management methods can achieve that
easily.

2. Merger-of-UNEQUAL
The merger between Chrysler Corporation and Daimler-Benz AG was supposed to be
a "merger of equals.# However, in this case, Chrysler was in a subordinate position
with weak management right. The Board of Management which is responsible for
managing day-to-day operations consists of eight Americans and 10 Germans and
Daimler controlled the majority of seats on the Supervisory Board. It was a big risk to
Chrysler, because Daimler is more likely to make Chrysler a subsidiary of Daimler and

12
Uncover your companys key value drivers,
http://www.evancarmichael.com/Buying-A-Business/2777/Uncover-your-companys-key-value-drivers.html
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Le Lu
MSF, Cohort 2
Clark University
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send Daimlers people to run it.

3. Confusion, but not Complementary
The merger between Chrysler and Daimler is supposed to be complementary. But
there is a great risk to Daimler-Chrysler that the merger would make them fall into
confusion. For example, Chrysler and Daimler-Benz's brand images were founded
upon diametrically opposite premises. Chrysler's image was low cost vehicle producer,
while Mercedes-Benz, in contrast, is a symbol of luxury and uncompromising quality
("quality at any cost"). These two brands, were they ever to share platforms or some
other features, would have lost their unique intrinsic value and blur their brand
image. Thats a great risk to Daimler and to Chrysler.
On the other hand, Daimlers engine technique and quality control methods may be
can improve Chryslers products, but it also can make Chrysler loss its high profit
margin advantage.


4. Culture Clash
Culture clash can not be avoided in a merger, even in mergers of companies in the
same country. In this case, between Chrysler and Daimler, executives and employees
of each company had to face many counterworks. For example, American workers
earned appreciably more than their German counterparts. (Schrempps total
compensation in 1997 was $2 million, while Eatons total compensation was $11 million.)
The difference between wages structure made dislike and dissatisfaction run deep
between employees and executives, which greatly eroding the anticipated synergies.
Some other culture clash:

Chryslers employees and executives ate in the cafeteria. Daimler-Benz had a system of
three-tier restaurant services for executives and employees, depending on their rank in the
management hierarchy: a first class restaurant (gold-spoon restaurant) for top executives; a
second class restaurant (silver-spoon restaurant) for middle management; and a third class
restaurant (plastic-spoon restaurant) for the rest of the employees.
Mid-level managers in Chrysler were used to walking in and out of offices of their superiors
whenever they had to report information and/or receive instructions. In contrast, German
executive offices were staffed with layers and layers of secretaries that middle managers had to
go through if they needed to see their immediate bosses.
Americans were used to drinking water or iced tea at lunch, while Germans preferred wine or
beer.
Americans called each other by first names, while Germans used formal titles such as "Doctor#
or "Professor.#
Americans were used to running from their offices to their bosses in shirt sleeves, while
Germans had to put on ties and coats.
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13
IMPACT OF SFAS 141 ON MERGERS: A CASE STUDY
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