Subba’s Serendipitous moments

May 15, 2007

Another mega-merger ends in a disaster.

Filed under: Business,Competition,Leadership,Strategy — Subbaraman Iyer @ 5:05 pm

Though I am not an auto analyst, and despite holding the view that mega mergers have rarely worked successfully, could not help but comment on the failed Daimler Chrysler merger.

The news is that Daimler is actually paying $650 million and selling 80% of their investment in Chrysler group to Cerberus Capital to get rid of Chrysler which they acquired for a mind boggling sum of $36 billion in 1998 in what was termed as a "merger of equals". The only advantage for Daimler would be to write off $18 billion in pension and health-care liabilities from its books. So, effectively Daimler is paying money to get rid of Chrysler and eliminate its liabilities. Cereberus is paying just $7.5 billion for the 80% stake in Chrysler.

There are many reasons cited for this failed merger and one of them is the culture differences between the companies. It is one of the worst financial catastrophe in recent years.All this seems to support Tom Peters view that "Mega mergers are the last refuge of scoundrels with no imagination" The FT editorial rightly calls this as value destruction on a truly impressive scale.

This is the first time a private equity player has entered the US auto industry.It paves the way for the private equity players to make their bids for GM and Ford as well.

Will Cereberus under Chairman John Snow, former Treasury Secretary turn this around? It looks unlikely in the short term, even if they can negotiate with UAW (United Auto Workers) to accept substantial wage cuts and find a way out of the rising health care costs. The UAW has for long held the industry to ransom, hence in the short term huge lay offs are imminent. Given that the labour costs at Chrysler is going to be almost twice as that of Toyota, Honda and Nissan, and that Chrysler has not had a successful product for many years, I wonder how will this turnaround be effected. I really don’t understand how anyone can purchase such a company with such a debt overload, unless they are confident that the Government is going to bail them out.

It only goes to show that in the mega mergers, there are just a few people who make it very rich, while the rest of the shareholders, employees and others end up suffering.

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