Case Study: Chrysler

I. Statement of the Problem In 1998, a merger of German automaker Daimler Benz AG (Daimler) and the American auto giant Chrysler Corp. (Chrysler), presented as “merger of equals” took place. However, after almost a decade, the once hailed as “the marriage made in heaven” turned out to be a complete failure and ended in May 2007. The merger of Daimler and Chrysler failed to live up the name due to clashing corporate cultures of the two companies, strategic missteps, and radical changes in trends of US auto industry. Chrysler’s decreasing profits was due to huge legacy of health-care cost, shift in consumer demand, increasing fuel prices and competition from Asian carmakers. The struggling and loss-making Chrysler was sold to New York-based private equity firm Cerberus Capital Management, L.P. (Cerberus), for $7.4 billion, acquiring 80.1% in Chrysler, including its financial service business Chrysler Financial. Daimler remained having a 19.9% stake in Chrysler. At the time Cerberus took over, Chrysler was already in the midst of a turnaround plan that includes the elimination of 13,000 jobs and a huge investment of $3 billion a year for new product development to meet shifting consumer demand. Would this private equity firm, Cerberus be able to turn around the distressed Chrysler and be its holy grail?

II. Areas of Consideration The value of the deal to buy 80.1 percent of Chrysler’s stake was $7.4 billion, leaving Daimler with 19.9 percent stake to the new Chrysler. Cerberus, taking over Chrysler had a financial commitment including $5 billion in Chrysler’s operations and another $1.05 billion in its financial service business while Daimler received $1.35 billion. However, Daimler had to pay Cerberus $650 million because of the restructuring cost it would incur until the deal was completed. Another critical and negative component of the deal was Chrysler’s unfunded health care liabilities. The agreement states that the new Chrysler would assume all the