- The Washington Times - Thursday, May 17, 2007

When the “merger of equals” between Daimler-Benz (the German industrial giant) and Chrysler Corp. (the number three U.S. automaker) was consummated in 1998, wags dubbed it “the marriage made in car heaven.” Those were the days.

Chrysler and its 121,000 employees had made a profit of $2.8 billion the year before, a billion more than its new German partner earned. The world spot price of oil was on its way toward $9 a barrel, and a gallon of gas cost less than a buck within a month of the deal. Jeeps and Dodge minivans, both hugely profitable, were flying off Chrysler’s assembly lines. Today, after two major Chrysler restructurings and in the midst of a third, Chrysler has 80,000 workers and will be shedding another 13,000. The world spot oil price is $62 a barrel, and the average cost for a gallon of gas is $3.14. With 100,000 Chrysler minivans, Jeeps and other unwanted vehicles sitting on storage lots last year, Chrysler lost $1.5 billion in 2006; and Toyota has replaced it as the third-largest auto seller in the United States. Chrysler lost another $2 billion during the first three months of this year.

Long after it became apparent that the “merger of equals” had in fact been Daimler-Benz’s $36 billion purchase of Chrysler to form DaimlerChrysler, the company announced this week that the marriage would be dissolved. In one of the most high-profile private-equity deals ever, Cerberus Capital Management has agreed to take 80 percent of Chrysler off Daimler’s hands — literally.

Indeed, while the price tag of the deal has been advertised as $7.4 billion, Daimler acknowledged when the deal was announced that the agreement would actually generate a net cash outflow of about $650 million for the German firm. With Chrysler hemorrhaging cash, Cerberus has agreed to inject $6.05 billion into its operations. Cerberus would send another $1.35 billion to Daimler. (Together, these two amounts represent the $7.4 billion “price tag.”) But Daimler, in turn, will send $1.6 billion back to Chrysler to help keep its head above water during its restructuring; and it will lend Chrysler $400 million on top of the $1.6 billion in grants. The net result is that Daimler will give Cerberus about $650 million this year to take 80 percent of Chrysler, which less than a decade earlier Daimler had paid $36 billion to purchase.

In the annals of industry and finance, rarely has the value of a firm collapsed so much after a merger (except, say, AOL after its shareholders gobbled up 55 percent of Time Warner in 2001). Why did Daimler effectively agree to pay Cerberus to take 80 percent of Chrysler off its hands? With its 80 percent ownership of Chrysler, Cerberus has agreed to take responsibility for the vast majority of the $18 billion in unfunded health-care liabilities for Chrysler’s current and retired workers.

Stay tuned. This isn’t over — not by a long shot. The United Auto Workers and Cerberus will soon be negotiating a new contract. The current one expires in September.

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