DaimlerChrysler chief executive Juergen Schrempp is likely to go as the ailing car manufacturer seeks a deal to refinance some of the e78bn of debt it has accumulated
The great takeover merchants of Europe's 1990s bull market have almost all departed the scene.
Jean-Marie Messier of Vivendi Universal SA? Gone. Ron Sommer of Deutsche Telekom AG? Gone.
Even Sir Christopher Gent, who retired as chief executive officer of Vodafone Group last month, is moving on to advise Lehman Brothers Holdings on international business. No doubt people can drop by his office for a coffee and a quick chat on how to make $100bn or so of shareholders' money disappear.
Still, like some peculiarly tough breed of limpet, one man hangs on tenaciously: Juergen Schrempp, the chief executive of DaimlerChrysler. How? That is a mystery to rank alongside the Bermuda Triangle. But right now it is hard to see how he can survive much longer.
Schrempp's tenure as the man in charge of the world's fifth-largest automaker has been a catalogue of disasters.
Recently, Schrempp reported a 90% drop in second-quarter profit as its Chrysler division suffered an operating loss of $1.1bn, the result of weaker sales and bigger discounts for customers. The company made e109m ($125m) for the quarter, compared with e1.1bn a year earlier. True, it has been a bad quarter for the European car industry generally. Volkswagen and PSA Peugeot Citroen have both reported poor results. Even so, Daimler has performed worse than most of its peers and it has lost about a fifth of its value in the past year.
Its shares currently stand at just e31, compared with about e95 at their peak in 1999. DaimlerChrysler now has a market value of almost e32bn, which is close to the price tag of about $36bn in stock Schrempp paid for Chrysler back in 1998. Essentially, Schrempp took the whole value of the old Daimler business, including Mercedes cars and trucks and a big chunk of Airbus, and made it disappear.
The importance of Daimler to the European economy should not be underestimated. It is among the Continent's biggest manufacturing businesses. Even in its current diminished state, it still represents 7.4% of Germany's benchmark Dax index. For the European economy to recover, companies such as Daimler need to start coming good.What went wrong?
Chrysler has been a troubled business for decades. Number three is a difficult position to hold in any industry, particularly in the fiercely competitive US auto industry. Daimler has been unable to fix it.That was not bad luck. It was a huge strategic blunder committed by Schrempp.
He argued that Daimler had to be bigger to survive. There was, he said, no place for a niche manufacturer. 'By combining and utilising each other's strengths, we will have a pre-eminent strategic position in the global marketplace for the benefit of our customers,'' he said in the statement announcing the merger.
'We will be able to exploit new markets and will improve returns and value for our shareholders. This is a historic merger that will change the face of the automotive industry,'' he said at the time. Er, not quite. The truth was precisely the opposite. Chrysler is just a dead weight hanging from the neck of what otherwise could be a formidable business. Look at its rivals, Munich-based Bayerische Motoren Werke and Stuttgart-based Porsche. BMW pulled out of its own ill-fated move into the mass market when it dumped Britain's Rover. Even though its profit dropped 19% in the first quarter, the shares have surged 18% this year.
With a value of e22bn, it isn't far from overtaking Daimler in value. That would be the final humiliation for Schrempp. Likewise, if you had switched out of Daimler shares into Porsche shares in 1998 to avoid the 'benefits' of combining mass market with luxury cars, you would have more than doubled your money.
The companies that focused on the luxury market have done well. Those that tried to move into the mass market have done poorly.
There is no question Mercedes would be stronger by itself. The combination of luxury and volume cars does not work. For more proof, look at the bundle that Ford Motor has lost while trying to revive Britain's Jaguar.
Still, Schrempp will not even think about breaking up his creation. The solution?
Maybe a brave private-equity firm should take a pop at Daimler. Look at the numbers. Right now, the company is paying a dividend yield of 4.8%. If you could buy it using money borrowed at 3% or less, it would not be hard to make a tidy profit on that.
DaimlerChrysler currently has total debt of about e78bn, according to Bloomberg data. Some of that has to be refinanced relatively soon. About e9bn of debt falls due next year and slightly less in 2005. That makes almost e20bn to refinance in the next couple of years, a tough challenge if a buyout were to lead to a cut in the company's credit ratings.
Still, just because the numbers are challenging, it does not make it impossible.
Will it happen? It should. And after a career of monumental strategic blunders, Schrempp does not deserve to remain at the helm.
Bloomberg newsroom, Singapore
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