Sloan: Why Daimler Is Paying to Dump Chrysler

It seems only fitting that DaimlerChrysler is dumping its stricken Chrysler subsidiary onto a firm called Cerberus Capital Management, which is named for the mythical three-headed dog that guarded the gates of hell. That's because when it comes to deals from hell, Daimler-Benz's purchase of Chrysler ranks close to the top of the list.

Daimler-Benz (now DaimlerChrysler, soon to be plain old Daimler) paid $36 billion to buy Chrysler in 1998. Now, like the owner of an old junker, Daimler has to pay to have Cerberus cart Chrysler away.

"This is definitely in the hunt for being one of the all-time deals from hell," said Robert Bruner, dean of the University of Virginia's Darden School of Business, a connoisseur of corporate catastrophes and author of "Deals from Hell: M&A Lessons That Rise Above the Ashes." Unfortunately for me, Bruner doesn't keep a "Ten Worst Deals" list, so it's hard to compare disasters with each other. Some deals—such as Time Warner's disastrous decision to swap its shares for AOL stock at the height of the Internet bubble in 2000—cost investors more money than Daimler's ill-fated acquisition of Chrysler. Other famous failures that Bruner analyzed, such as the 1968 merger of the Pennsylvania and New York Central Railroads, helped accelerate the collapse of the combined firm.

But when it comes to what Bruner calls "loss of value, loss of strategic advantage and loss of brand franchise," the Daimler takeover of Chrysler is right up there with the leaders. Or the losers.

Here are the numbers. In 1998, Daimler paid $36 billion in stock to buy Chrysler. Yesterday, it announced a sale in which it's putting more money into Chrysler than it's taking out. Yes, headlines say that that Cerberus is paying $7.4 billion to buy an 80.1 percent stake in Chrysler. But almost none of that money is going to Daimler.

Here's how it works, as best I can understand it: Cerberus is investing $7.4 billion in cash, of which $1.35 billion will go to Daimler. But as part of the overall deal, Daimler is putting $2.5 billion in cash into Chrysler and lending it another $400 million. So Daimler ends up about $1.5 billion out of pocket. It also gets a 19.9 percent minority stake in the new Chrysler, a stake that I'm sure is worth less than $1.5 billion today.

Daimler is willing to pay to get Chrysler off its hands because it wants to escape Chrysler's health-care obligations to retirees and workers. (It's not clear to me exactly how this deal gets Daimler off the hook—but what do I know?) Those obligations looked manageable nine years ago, when Chrysler was at peak performance, Daimler was cooking and the talk was of a "transnational" automaker that would grow and grow by combining the best aspects of the upmarket German company and the midmarket American one. Alas, the world changed, Chrysler began cutting back, and the health-care obligations became an increasingly heavy weight on an ever-shrinking operation.

In hindsight, we should have counted Chrysler's unfunded health obligations as part of the cost Daimler-Benz was incurring. Instead, all we counted was the value of the stock Daimler-Benz issued.

We also should have counted Chrysler's unfunded pension obligations. The company said yesterday that its pension plans are now overfunded, but I'm sure it's had to put some heavy money into them since 1998, which hurt its ability to compete.

Despite being a private-equity shop, Cerberus claims that it's in this for the haul, rather than to strip and flip. We'll see. After all, what seems like a deal from heaven today can turn into a deal from hell tomorrow. In the meantime, it's auf Wiedersehen to DaimlerChrysler.