Monday, May 14, 2007


by Tom Bozzo

On the news of today's Chrysler sale, Atrios suggests that the debacle may be in the running with the AOL-Time Warner as "Stupidest Business Decision Ever."

For the absolute magnitude of paper-wealth destruction, AOL-TW is rivaled only by enterprises whose managers are serving or would otherwise be serving lengthy prison terms for their troubles.

Still, the major media versions don't quite do justice to the Chrysler deal, covered at length by Automotive News here.

The merger that formed what's known for the moment as DaimlerChrysler was a $36 billion deal in 1998. Adjusting for CPI inflation, the transaction would be worth $45.4 billion in current dollars, so DC paid $36.3 billion in current dollars for the 80% stake that it's selling.

The headline amount for the purchase is $7.4 billion, making it look like the value of Chrysler is 20% of what it was in 1998. But really, it's even worse than that: a little more than $6 billion of the $7.4 billion is an infusion of equity into the new Chrysler. In all, DC is effectively paying about $600 million to get rid of its Chrysler stake — netting restructuring costs payable by DC from the $1.05 billion payment from Cerberus Capital Management to DC.

What the soon-to-be just-plain Daimler AG's trying to do, it seems, is free itself of Chrysler's
retiree health care liabilities, valued at $19 billion per Automotive News.

This makes Dr. Z look less than candid in claiming that:
[As a result of DC-era product development] Chrysler today is structurally more sound than its North American based competitors.
Which is why he's making it the problem of private equity gamblers — who presumably have cast-iron stomachs.

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Cerberus, of course, bought GMAC near the end of last year—which, as I noted here two months ago led to even greater costs to GM than originally expected.

Don't be surprised if the same type of pill is in this deal, making it even less appetizing.

TW/AOL =>TWX isn't even the worst TW deal—the original Time-Warner t/a/k/e/o/v/e/r/ merger was a true cf, well before cancer took Steve Ross.

Any professor who speaks as if EBIDTA should be taken seriously as a measure of the strength of a company should be denied tenure, unless there's a special Larry Kudlow/Ben Stein chair endowed for them.
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