How to blow $36 billion

GUIDO REINKING

How to blow $36 billion
Magna International should be glad it lost out

Guido Reinking is editor of Automobilwoche.

Guido Reinking | Automotive News Europe
May 14, 2007 - 3:30 pm

MUNICH -- Until two weeks ago, it looked like Magna International Inc. would take over the Chrysler group. The negotiations were very lively. Hedge funds didn’t seem to have a chance because a sale to an “unscrupulous investor” was rejected by DaimlerChrysler board members.

But it was the bid of hedge fund Cerberus Capital Management that was accepted after all. The hell hound snapped Chrysler away from Magna.

Magna founder Frank Stronach should not be too sad about that. The expectation to take over Chrysler, with its $18 billion in health care and pension liabilities, should be a real nightmare for an honest, computing businessman.

Daimler accepted the Cerberus bid because the investment fund takes 80.1 percent of Chrysler and with it the risk for unsecured pension checks. Magna always wanted only 49 percent of Chrysler.

The 5.5 billion euros ($7.45 billion) Cerberus is paying should boost the equity capital and therefore be a counterbalance to the backbreaking pension charges. They do not even cover half of those liabilities.

The core question is still not answered by selling Chrysler to Cerberus: How should an automaker, which is struggling with such legacy costs, survive against competitors such as Toyota Motor Corp.? And while we wonder about whether Chrysler will survive against those costs in the long term, it is even more interesting to know how General Motors and Ford Motor Co. will endure this. Their burdens are much higher.

Another question comes to mind: Couldn’t this have been predicted already in 1998 when former DaimlerChrysler CEO Juergen Schrempp bought Chrysler for $36 billion?