Case Study 13-4 Cerberus Capital Management Acquires Chrysler Corporation

By: BaZazuna :P

1 Cerberus Capital Management

Daimler Chrysler

Deal Structure

Case Study Questions

Content

2

3

4

Is an American private equity firm. The firm is based in New York City, and run by Steve Feinberg, who co-founded Cerberus in 1992 with William L. Richter.

Cerberus has more than US$20 billion under management in funds and accounts. The company is a U.S. Securities and Exchange Commission Registered Investment Advisor. Investors include government and private sector pension and retirement funds, charitable foundations, university endowments, insurance companies, family savings and sovereign wealth funds.

It had a 51% ownership of GMAC, GM’s former auto financing business.

Cerberus Capital Management(Acquirer)

Is a German multinational automotive corporation. Daimler AG is headquartered in Stuttgart, Baden-Württemberg, Germany.

By unit sales, it is the thirteenth-largest car manufacturer and second-largest truck manufacturer in the world. In addition to automobiles, Daimler manufactures buses and provides financial services through its Daimler Financial Services arm.

DaimlerChrysler (Target)

Chrysler has been the third largest of the "Big 3" U.S. automakers, but in January 2007

Chrysler reported losses of US$1.5 billion in 2006 It then announced plans to lay off 13,000 employees

in mid-February 2007, close a major assembly plant and reduce production at other plants in order to restore profitability by 2008

Chrysler maid the decision to sell the company in yearly 2007

DaimlerChrysler (Target)

20%

80%

CerberuscapitalManagement

ChryslerCorporation

Deal Structure Purchase price - $7.4 Billion in cash

$1.35 – goes to Daimler. $6.05 billion – invested in Chrysler

$1.05 billion – in finance unit

$5 billion – in Auto Manufacturing operation

Deal Structure

Daimler also agreed to pay $1.6 billion to cover Chrysler’s long term debt, between four month before signing the contract.

Cerberus also assumed responsibility for $18 billion unfunded retiree pension and medical benefits.

Daimler also agreed to loan Chrysler Holding LLC $405 billion.

Cerberus invests its own fund in the business.

UAW (United Auto Workers)

Under the agreement with United Auto Workers (UAW) the management of $1.2 billion in health-care liabilities was transferred to a fund managed by the UAW, with Goodyear contributing $1 billion in cash and Goodyear stock.

By transferring responsibility for these liabilities to the UAW, Chrysler believed that it would be able to cut in half

the $30 dollar per hour labor cost advantage enjoyed by Toyota.

GMAC

GMAC had a commercial banking status to be able to borrow directly from U.S. Federal Reserve.

In late 2008 U.S. Treasury purchased $6billion in GMAC stock.

To avoid for being classified as a bank holding under government supervision it sold it shares 14.9% of voting stock and 33% of total equity.

In early 2009, Chrysler entered into negotiations with Italian auto maker Fiat to gain access to the firm’s technology in exchange for 20% stake in Chrysler.

Case Study questions: 1. What were the motivations for this deal from Cerberus’s

perspective? From Daimler’s perspective? 2. What are the risks to this deal’s eventual success? Be

specific. 3. Cite examples of potential economies of scale and scope. 4. Cerberus and Daimler would own 80.1 percent and 19.9

percent of Chrysler Holdings LLC, respectively. Why do you think the two parties agreed to this distribution of ownership?

5. Which of the leading explanations of why deals often fail to meet expectations (i.e., tendency to overpay, slow integration, and bad business plan) best explains why the combination of Daimler and Chrysler failed? Explain your answer.6. The new company, Chrysler Holdings, is a limited liability

company. Why do you think Cerberus chose this legal structure over a more conventional corporate

structure?

№1From Cerberus perspective Private equity investors acquire and go private, then

regenerate or resurrect the ailing entity with for a future profit sale.

Cerberus used the mortgage the entity assets so as to provide funding whatever acquisition price decided upon

With the uncertainties of future cash-flows, Cerberus had to invest personal funding so as to keep the entity afloat until its long-term goal comes in sight.

It also thought that with existing synergies with GMAC, it would be able to strike borrowing relationships with the federal government.

№1 It banked on many hopeful possibilities such as to create

alliances with other entities and spread much of the acquired risks around, including retiree health-care liabilities.

Eliminating duplicate jobs and combining those with potential overlap.

Benefit form economies of scale and scope

№1

From Daimlers perspective It was willing to take on responsibilities so as to allow the

alliance to materialize It was made to retain its existing 19.9 percent ownership/equity

whilst still providing loan to the combination so as to mend looping gaps in financing.

Daimler thought , that alliance was more geared towards continuity. It might have believed that firm would continue to do well and it wanted to stay on and ride with the bounces.

№2

The presence of a very sizable debt and uncertainty regarding future cash-flows, the future success seemed to have installed by these huge stumbling blocks.

Another risky move made was with the belief that an alliance with GMAC would allow it to cut costs by eliminating duplicate jobs whilst at the same time combining whatever jobs were viewed to be overlapping.

Borrow from the federal government

№3 Economies of scale were likely to be realized in the two-firm

alliance with GMAC and Cerberus. To slash costs by eliminating duplicate jobs,

combining overlapping jobs functions and operations, as well as in combining back office operations.

This reduction in production costs could allow for cheaper services and products to be passed on thereby increasing revenue.

Greater benefit could be passed on to client-base whilst tapping into other market share, and eventual revenue growth.

Additionally, expenses could reduce significantly and gives it the renegotiate debt instruments and lessen its burdens.

№3 Economies of Scope

Economies of scope could come about by using existing data centers to increase the number of possible loans it could generate.

Potential economies of scope could have been realized if the attempt to acquire funding from the Federal Reserve, it might be able to provide cheaper loan services to its customers and potential customers alike.

Synergy considered with Fiat, could allow it to use Chrysler’s technology in exchange for a 20 percentage stake. The existing technology could allow for greater existing resources to be used to grow other opportunities and generate future income.

№4 This distribution of ownership was decided upon base on the fact

that Cerberus seemingly had the capacity to fully absorb the acquisition costs and Daimler choosing to remain with its stake of equity.

Additionally, this kind of a deal was atypical of private takeovers, which allowed private equity owners to use either the target’s assets or cash flow to use as collateral. Because Cerberus is the main instigator, it seemed to have proposed to assume that portion of equity not held by Daimler.

Cerberus wanted to call the shots and this percentage ownership allowed it to basically be in control of all moves going forward.

20%

80%

CerberuscapitalManagement

ChryslerCorporation

№5

The deal seemed so hastily arrived at that the acquirer was not even aware that enough cash-flow was not being generated by the entity so allow for the proper collateral to be had so as to secure proper financing.

Size and magnitude of the Chrysler’s retiree health care plan seemed to have not been fully known, as contingency plans could/should have been made to take care of this issue.

There seem to be no evidence of what exactly the next more will be and levels of confidence embedded in the respective undertakings.

№5

With Cerberus, a capital management entity acquiring striking such an alliance without proper thoughts and know-how of the entity operations was not able to transition the entity into any form of success.

With Daimler being the minority shareholder, its efforts and decision-making seemed stifled as not much was said about subsequent contributions away from the equity share, loan and debt absorption.

№6Cerberus chose the corporate structure of Limited Liability Company (LLC) because of the legal protection that it provided:

By choosing this type of structure, it is able to keep the new firm separate and apart from its main operation – capital management.

This form of business could also allow for favorable tax benefits to be had where profits and loss could be transferred through to owners without being taxed.

Additionally, an LLC allows for alliances to be created while keeping ownership confined to a particular culture or foreign investors so as to keep contracts in-tact, customers and other clientele base, suppliers, patents, copyrights among other key issues.

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“Sastavi”