4/1/2007 | 4 MINUTE READ

Insider: Zetsche’s Bluff

Facebook Share Icon LinkedIn Share Icon Twitter Share Icon Share by EMail icon Print Icon

Zetsche’s gamesmanship may be the best game of bluff he’s every played as the investors get reeled into the game.


Facebook Share Icon LinkedIn Share Icon Twitter Share Icon Share by EMail icon Print Icon

DaimlerChrysler Chairman Dieter Zetsche sent the auto world reeling when he said “all options” were on the table when it came to the future of the Chrysler Group, but his actions may prove to be the biggest bluff this industry has seen in many years. While some private equity firms—along with General Motors—are reportedly lining up to get a peek under the hood at Chrysler’s financial outlook and select future products, there may be some insurmountable obstacles that even the wealthiest of investors may find a bit tough to digest, which would be just fine for Dr. Z.

Let’s start with the discussion of overcapacity. According to some industry observers, there is 20% more production capacity in the world than demand. Projections point to that statistic getting even worse as automakers gaining market share at the expense of the long-established OEMs continue to open new factories throughout the world. One consequence of these new, typically more-productive plants is that those they leave the plants that have long been there slowly churning out product that decreasing numbers of people are buying. The problem with this scenario is not one OEM wants to be the first to admit they’re the loser and slash production in line with overall demand. Chrysler has an overcapacity issue it needs to grapple with. Plans are already in place to idle the Newark, DE, plant where the Dodge Durango and Chrysler Aspen are built. Additional shift reductions are expected at other plants, but that may not be enough to stave off the inevitable. Makes you wonder what investor would want to come in and buy all these plants just to have to mothball them? Idling thousands of workers would cause another problem as potential investors would have to deal with billions in legacy costs needed to fund the benefits of both active and retired workers, with the ranks of the retired growing exponentially as plants close and volume shrink.

Yet another factor that would likely scare away any potential investor would be the upcoming national bargaining talks with the United Auto Workers union, which already has shown some resistance to providing Chrysler with health-care concessions in-line with those the union granted at GM and Ford. That lack of willingness to cooperate and the union’s militant history has been enough to keep even established automakers out of the state of Michigan, the epicenter of unionization.

Even if after all of these factors a private equity firm decided it would be prudent to buy Chrysler, the likelihood Daimler would get its $38 billion investment back would be between slim and none, with slim having already left the building. The value of Chrysler could be as low as $5-billion. That might not be enough for Daimler’s Germany hierarchy to agree to send the Americans packing.

Rather than speculating on who will buy Chrysler, it might be prudent to think for a minute that maybe, just maybe, the whole study may be for naught. Zetsche may be going through the motions just to prove to his counterparts that DaimlerChrysler will not be able to get fair value for Chrysler, which could put a stop to the talk of a potential sale. Likewise, he could be using the sale as an attempt to scare the union into agreeing to deeper concessions than they would have given through the drawn out course of talks. In the end Zetsche may finally convince everyone in Germany that’s it time to stop the in-fighting and accept that Chrysler is part of the team and begin the process of breaking down the walls between Chrysler and Mercedes. This may turn out to be his most artful game yet

ers who may or may not be on the brink of financial crises. After having been beaten up by public traders and analysts ad nauseum, this may be the only avenue left to show the “investment experts” there is a future as an automotive supplier. Going private would also relieve Lear of having to comply with thousands of pages of securities regulations—most notably the Sarbanes-Oxley Act of 2002—that add unnecessary reporting and associated costs, which become an ever-increasing burden on enterprises living off profits in the pennies for many of the parts they supply.

Leaving the public equity markets also provides a more free-wheeling environment without the constant badgering from investment analysts trying to predict your next quarterly profit or whether your return-on-net-sales level is within the industry norm. All of that becomes a thing of the past. Making investments in “moon shot” ideas are also less likely written off as “flights of fancy” that degrade shareholder value. By no means is there an implication that private companies don’t have to make a profit. But they may have some leeway in terms of the exact level of profitability desired by their investors. The goal may be a 2.5% return one year and maybe 5% the next, depending on market conditions. The exact level, however, is not predicted by five or six analysts who sit in their offices on the Upper West Side of Manhattan.

There are a few drawbacks to taking an enterprise private: First, there is a lack of transparency in that the company no longer has to provide any financial data whatsoever to employees or other outsiders. Investors could also be looking to gain a quick buck and could gut the operations through cost reductions and just sell off the enterprise to yet another private equity firm who will keep the vicious cycle going until there is nothing left to salvage.

Still, everyone needs to take a deep breath and give the private equity investors a chance to see if they can make a go at the auto supply sector before declaring the arrival of D-Day. After all, listening to Wall Street hasn’t proven to be the best course of action.