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Chrysler, Daimler, Cerberus: Who Got Screwed?

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Hell is not a place that is usually invoked in discussing corporate mergers and acquisitions. But it has come up frequently in discussions of the unwinding merger of Daimler-Benz and Chrysler. When news of the sale of the Chrysler unit to a private equity fund broke, The Wall Street Journal’s DealBook compared the 1999 merger to the “Deals from Hell” discussed in a book of that title from Robert Bruner, dean of the Darden School of Business at the University of Virginia. The phrase also made it into the title of a Newsweek article by business columnist Allan Sloan.
"This is definitely in the hunt for being one of the all-time deals from hell," said Bruner tells Sloan.
One of the inspirations for all this is the name of the private equity firm acquiring Chrysler—Cerebus. The firm takes its name from the three-headed dog said to guard the gates of Hades in Greek and Roman mythology. Another, however, seems to be the hellish negative return the Germans appear to have received for their purchase of Chrysler. The company then known as Daimler-Benz paid $36 billion to acquire the company, and took on enormous unfunded health care and pension costs—usually called “legacy costs”—as part of the deal. Last week Daimler cut a deal in which it will wind up paying the new owners to take it off their hands.

For Bruner the question of whether or not the 1999 deal qualifies as arising “from Hell” depends on whether or not Daimler-Benz could have known that it would end so badly. “Daimler’s purchase of Chrysler was motivated by sound industry fundamentals, surveying the industry and seeing a need for manufacturing scale,” Bruner said in a DealBook interview with the author. Sloan, however, is a bit less forgiving, noting that the risk of ballooning legacy cost should have been counted as part the purchase price when the deal was made. But authors agree that Chrysler was hammered by a contraction in the market for domestic US autos.
“It’s a terrible deal for value destruction and for loss of strategic position and impairment of brand name, but it’s not clear that any other buyer of Chrysler would have achieved a different outcome given the same operating environment since 1998,” Bruner says in the interview.
At least one person would strongly object to that claim. Former Chrysler chief Lee Iacocca, writing a guest commentary in the most recent issue of Business Week, places the blame for Chrysler’s deterioration squarely on the shoulders of Daimler. “There’s one thing everyone agrees on: Daimler screwed Chrysler royally,” Iacocca writes.
That’s an overstatement, to put it mildly. In fact, it’s hard to find the kind of unanimity for that opinion outside of the mind of Iacocca, and perhaps some particularly pro-American saloons in the suburbs of Detroit. Many would say that it was Daimler who got screwed. Over the last few years as Chrysler’s situation worsened, observers have cited many ways in which Daimler’s decision to pay for Chrysler might have been a mistake. Iacocca’s evidence for his position is simply post-hoc, ergo hoc—Chrysler looked a lot better nine years ago than it does today.
No doubt there have been mistakes in Daimler’s management of Chrysler—mistakes that Cerberus is betting it can correct. But given the ailing condition of other US domestic auto-makers, it’s hard to accept Iacocca’s position on its face. If anything, it seems a bit self-serving. Iacocca served as chairman and chief executive of the company until 1993 and hasn’t been shy about who he believes is responsible for Chrysler’s earlier successes—namely, Lee Iacocca. Indeed, Iacocca hasn’t been happy with anyone who has run the company since he left. He once referred to his selection of his successor, Robert Eaton (who oversaw the sale to Daimler), as “the worst decision I ever made.”
For Iacocca and his associates, it seems that the main question is whether the sale to Cerberus is a “deal from hell” or a “hell of a deal.” Although he’s voiced reservations about a private equity firm running Chrysler in the past, Iacocca seems better disposed toward the deal than many expected. He downplays fears that Cerberus will strip the company of valuable and seek a profit from quickly selling it. “Cerberus’ track record…is pretty good in this respect,” he writes.
There are those who wonder whether Chrysler can be saved, even by the team Cerberus seems willing to set loose on it. Is every deal for Chysler a deal from Hell? One industry watcher we spoke to (and who asked to remain anonymous) went legendary when referring to the possibility that Cerberus might have bitten off more than it can chew with the Chysler purchase.
“Cerberus is supposed to be this fierce guardian,” he said. “But in every time someone comes up against him, he gets beat. He gets put to sleep by Orpheus, Psyche, Aeneas and Hermes. Hercules wrestles him into submission. Even Dante and Virgil, little poet men, get past him. Take your pick which one of these guys and girls you want to use for Chrysler as the nemesis of Cerberus.”
The question of the diabolical origins of the Daimler-Chrysler deal might also depend on who is asking the question. The German automaker took a huge hit. But there are two sides to every deal, and the deal might look a bit different to investors in Chrysler who sold their stakes at the time of the deal.
“Arguably this turned out to be a good deal for Chrysler shareholders who sold out at the time,” Bruner says.

Iacocca: "Daimler Screwed Chrysler"
[Business Week]
The Deal From Hell [Newsweek]
Was Chrysler Buy a ‘Deal From Hell’? Mr. Bruner Weighs In [DealJournal]
How Daimler-Chrysler Stacks Up Against ‘Deals From Hell’ [DealJournal]