Daimler to Sell Off Chrysler for $7.4 Billion

DaimlerChrysler announced today that it would be selling 80.1% of the Chrysler Group to Cerberus Capital Management, a private equity firm. Daimler paid over $36 billion in 1998 for Chrysler, but Cerberus Capital will only pay $7.4 billion if the deal is approved. However, the private equity group is taking on a large risk because of billions of dollars in retiree pensions and health care costs that will be retained by Chrysler.

When Daimler-Benz and Chrysler merged in 1998, there was much hope that the two automakers would become a global leader in their markets. However, the changes in the North American market to smaller, fuel-efficient cars, clashes in corporate cultures, and grave mistakes in corporate strategy caused the promising marriage to end quickly. Chrysler has suffered large financial losses, including $1.5 billion last year alone and has plans to lay off over 13,000 jobs in the future. The Mercedes-Benz brand has also suffered in terms of quality and reliability over the last ten years.

Daimler Chrysler AG will retain 19.9% equity interest in Chrysler and continue to work with its North American counterpart on drive systems, and other products and services outside North America. The deal should be completed by the third quarter of 2007 and shareholders will be asked to approve a change of name to Daimler AG.

According to DaimlerChysler's website, "Chrysler Holding LLC will hold 100% each of the future Chrysler Corporation LLC, which produces and sells Chrysler, Dodge and Jeep® vehicles, and the future Chrysler Financial Services LLC, which provides financial services for these vehicles in the NAFTA region."

Former U.S. Treasury Secretary, John W. Snow chairs Cerberus, which holds significant interests in a variety of companies worldwide whose combined annual revenues equal over $60 billion. Last year Cerberus lead a consortium of investors, including Citibank Inc. and Aozora Bank, to buy GMAC (General Motors Acceptance Corp.) for $14 billion. It is expected that Cerberus will combine GMAC and Chrysler Financial Services operations.