Twice In Buying Chrysler

Should Gm Think Twice In Buying Chrysler?

In the news: Reuters has recently reported that DaimlerChrysler AG shares have increased to more than 4% which is considered to be the highest level reached by the automaker since August 2001 and this is despite the fact that there are continued talks on the possible sale of the Chrysler Group. The stock hit a peak of 56.34 euros and closed at 3.6% or 56.08 euros while the DJ Stoxx European car sector index has been able to gain 1.7% only. According to Weekend reports, there are many companies that are interested in buying the Chrysler Group and one of these is South Korea? Hyundai Motor Co. According to unnamed sources GM Chief Executive Rick Wagoner has already met with DaimlerChrysler Chief Executive Dieter Zetsche in Detroit last December 2006 to discuss the possibility of GM buying Chrysler. But news of the said meeting only came out last week. And according to some people familiar with the situation, General Motors and DCX are not only discussing the sale of Chrysler but are also contemplating a possible alliance. Unfortunately, both automakers have refrained to comment on the matter. Reuter’s source further reported that DaimlerChrysler is still in the process of studying all options available for the Chrysler Group such as a restructuring, a spinoff or sale. Most of the analysts in the auto industry, however, do not think that it is a good idea for GM, the world’s largest automaker and maker of popular brands of auto parts like GM brake drums to takeover Chrysler since it would only complicate the turnaround efforts of the automaker. Further reports from Detroit News confirmed that at least four meetings have transpired involving DaimlerChrysler Chief Financial Officer Bodo Uebber, GM Chief Executive Rick Wagoner, and GM Chief Financial Officer Fritz Henderson. But according to the newspaper, the merger talks are primarily ongoing between Henderson and Uebber. What is the worth of Chrysler? According to Morgan Stanley, the approximate value of Chrysler is 7 billion euros or $9.2 billion inclusive of healthcare liabilities or 3 billion euros to 5 billion basing on the leveraged buyout model inclusive of its pension and healthcare burden? A five billion equity value for the Chrysler division would just be over 10% price to sales, making Chrysler the cheapest car company in the world on our numbers, less than half the value of PSA or Peugeot Citroen? An analyst at Bank Sal. Oppenheim also said that if ever GM does purchase Chrysler it would add economies of scale for research and development plus it would eliminate the problem of overcapacity which causes the price war in North America. Unfortunately, the sale of Chrysler would also result to plant closures affecting thousands of workers adding up to the increasing number of unemployed workers caused by the restructuring programs of GM and Ford. Other analysts in the industry that are keenly tracking the GM and DCX talks have also pointed out some negative aspects of Chrysler saying that its unionized workforce, hefty losses, and unfunded health and pension liabilities are facts that should not be overlooked by future buyers. They also suggested that DaimlerChrysler should loosen up the 1998 merger between Daimler-Benz and Chrysler that created the world’s fifth-biggest automaker and make a floating part of an independent Chrysler on the stock market or better yet spin it off to shareholders. The analyst from Sa. Oppenheim has also estimated that it would cost around 22.5 billion euros for DCX to separate itself from Chrysler. The breakdown of the said estimate is as follows: 13.9 billion would go to pension and healthcare plans while the remaining 8.6 billion to raise Chrysler? balance sheet. Zetsche has also told reporters that all options for Chrysler are laid on the table but he did not elaborate on the subject.