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Articles from BusinessWeek


For Investors, Daimler-Chrysler could be a high-octane combo


Jurgen Schrempp, CEO of Daimler-Benz (DAI), will become co-chairman with Chrysler (C) CEO Robert J. Eaton of DaimlerChrysler (DCX) in mid-November. In the Asia Room, a library next to his office that he has filled with books on the region, Schrempp spoke with Frankfurt Correspondent Karen Lowry Miller about the merger, his management style, the combining of two company cultures, and more. Here are excerpts of their conversation:

Q: You've been strongly criticized in Germany for advocating shareholder value.
I was called everything. "Rambo of the Nation" was the friendliest. But you have to believe in what you are doing. If you are the icebreaker, a man not only running a company but possibly setting the tone for corporate change in Germany, you have to understand that you will have many critics.

Q: How do you benchmark yourself?
We do benchmarking for all of our businesses, but for me, personally, Jack [Welch, CEO of General Electric] is my benchmark. I wanted to steal a senior guy from him, and I saw how loyal they are to him. Actually, I could have got him, but I couldn't pay him the stock options.

Q: Do you consider yourself a car guy?
I consider myself very much an automotive man, not just a car guy. I'm also very much a truck guy, it's a very exciting business, very international.

Q: What is your vision for DaimlerChrysler?
In 10 years we must be, I won't say largest though we may be, but the greatest transport and auto company in the world. That means in terms of profitability, in being attractive to employees around the world, in being accepted as a good corporate citizen wherever we operate, in being a company which is geographically located where the markets are, and in being accepted and loved by our shareholders.

However, in three to four years, we have to create the situation with our people that they identify first of all locally with their factory, with their business unit. Then that they say look, we are so happy to work for this great company DaimlerChrysler, because I believe very much that half the success of a company is the emotions, the love, the identification of the people to a company. The other half is professionalism and knowhow.

Q: Have we seen the last big auto boom?
No. You will always have cycles. After this downturn, or highly unlikely recession, we will see an up again. This is a merger forever, not for sunshine or rain. Whoever takes responsibility in an automotive company has to manage cycles.

Q: How does the merger impact the auto industry?
I was worried because there are quite a few competitors around who immensely dislike what we are doing. This is a compliment, by the way. I knew that if what we wanted to do came out too early, many people would try to stop us.

I am not naive. I know we will have snags. I know there will be the occasional problem. I know we will be watched like hawks. I know all that. But we have a tremendous basis for understanding. And that we have a good business case there is no doubt.

Q: Do you anticipate a recession in the auto industry?
I don't anticipate a recession, but at the end of the day I cannot exclude it because I do not know what the development in Asia will be and how much it will affect South America and affect the U.S. and obviously trade. I'm not pessimistic, but I want to be careful as an entrepreneur. We have made the experience in the beginning of the 90s when we were not prepared for a downturn. This time I want to be prepared for it.

Q: How do you describe your management philosophy?
I call it the Schrempp Curve. You must not only have a good business case. To get acceptance for it you must not strive for the 100% at once, you can never go too far. You take a step to improve profits for example, which might provoke fear. If you start correcting, you are dead. Wait, and once you are in a stabilized position again, you can take the next step. You may also go down, but not that far, because people can see in the meantime you have delivered on your earlier promise.

I love to play chess. But if I tell you what my next move is because I'm an honest guy, I lose.

Q: What is your leadership style?
You should ask other people that.

Q: I did. But how do you describe your leadership style?
I believe in the creative side, to find an optimal solution. And in democracy. I'll listen to any rank, it's the arguments which count. However, leadership means at some stage you have to summarize the arguments and make a decision. Decision is not a matter of committee, you have to take responsibility. Debate is not forever. Speed is a competitive factor. It's better to have 80% than to wait for 100%.

Q: You will have the German system of co-determination [with labor representatives on the supervisory board] in DaimlerChrysler...
Yes, it is lengthy, it is cumbersome, but the good part of it is, once you have an agreement and you sign it, everybody sticks to it, abides by it, and implements it. No one turns around.

Q: Will your relationship with labor change once a member of the United Auto Workers also sits on your supervisory board?
I don't know. I'm looking forward to that. The labor representatives have to agree among themselves before meetings. Now they will have an American amongst them, with a different labor culture. It will be interesting to see how that develops. It's a test, we've never done it. And I love it, I love all new things that lead to internationalization and globalization in the true sense of the word.

Q: The Smart [city car launched in October] is not doing so well.
Every carmaker has the duty to find an answer for individual transport in a congested city. It's not the answer, but it's an attempt. So whether we ultimately get to the numbers we need, we don't know. We have some new ideas in the pipeline. Whether it might be a small four-seater, whether there might be convertibles, there are lots of fun cars they have on the drawing board.

Q: When do you expect Chrysler passenger cars to make money?
It's wrong to say that Chrysler passenger cars are making a loss. In total they are profitable, some more, some less. As for whether they should make more money, that's a different question.

Q: What is the difference between the Daimler and Chrysler cultures?
We are perceived as being more bureaucratic, slower in decision-taking, however more analytical, more long-term looking, more technology-minded, that's the perception. The perception of the Chrysler side is quick, sleeves up, a team sits around, makes a big decision and they implement it. Possibly less tech-oriented, and more marketing-oriented. There are the perceptions, and I think by and large it's possibly not a bad description.

However, I must say, at the top level, I haven't found it yet. I'm not naive. When you come to the middle and lower management levels, there are issues which are digital, where they feel, this one wins, or this one wins. Now it's up to top management to ensure that those obstacles are removed.

Q: How would you describe the new DaimlerChrysler culture?
We came to the conclusion that somewhere in the middle would be the right thing. Most companies have weaknesses and strengths. Surely there will be a new culture, but I don't want the people to lose the identity with the people around them. I want the Mannheim people to identify with Benz, the Toledo people with the Jeep brand.

Some people are very anxious that we want to install a new DaimlerChrysler culture up to the last factory, that's not so.

Q: I presume we'll eventually see the Schrempp Curve applied to DaimlerChrysler. What's next?
I think there are lots of things which must stay in small circles, or possibly even only in my head. Our immediate goal, make no mistake, we have to prove something to the world, is that those $1.4 billion dollars [in cost savings] must be put on the table.

And then obviously comes our integration. And this is tough, we have said within two or three years we want to have the company not only factually together, but also to a large extent emotionally together. Three years is almost a tactical time span, not any more a strategic one.

Q: So the structure won't stay as you describe?
The only constant is change. This is for some people very difficult, it makes them nervous. Depending on how things develop, we might do things quite earlier than anticipated, some things we might have to do later, we need that kind of flexibility.

Q: So after three years, the organization could be more streamlined?
Anything is possible, and it's a matter of timing. But you could visualize a time to come, where apart from the global purchasing you also have somebody in charge globally for production. You can visualize that. But I think the way we have designed it is the right way. We are in no hurry to do that.

Three to five years down the road, the anxiety that the German side be Americanized and the American side Germanized is gone because we have proved the point. Then decisions like that, if they are necessary, are much easier.

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When James Stratton purchased shares of Chrysler (C) for the Stratton Growth Fund (STRGX) 18 months ago, he was drawn by the scrappy No. 3 U.S. auto maker's low price relative to its strong sales. Now that Chrysler's stock is about 60% higher and the company is being acquired by German industrial giant Daimler-Benz AG (DAI), this value manager is holding on.

Soon to be the world's fifth-largest maker of cars and trucks, DaimlerChrysler is poised to usher in a new era of globalization for auto sales. With strengths in different segments of the auto market and different parts of the world, the two companies are considered a good fit: Mainstreet USA meets luxury German engineering. "Our inclination is to take the new stock and hold it," says Stratton.

Ken Shapiro, who bought Daimler-Benz for clients of his Martinsville, N.J., investment advisory firm Condor Capital, has reached the same conclusion. He thinks Daimler's top-flight Mercedes brand name and superior engineering can make Chrysler only stronger. Most important, he thinks management has the smarts to implement the merger without cheapening the Mercedes brand. For investors, he says, "I don't think it makes sense not to do the exchange."

Shareholders in both Chrysler and Daimler need to decide over the next week whether to participate in the merger or sell their shares. The new DaimlerChrysler (DCX, when issued) shares are expected to begin trading on both the New York Stock Exchange and in Frankfurt on Nov. 16. Chrysler stockholders will receive 0.6235 a share in the combined company for each Chrysler share they own. About 60% of earnings in the new company will be from the Chrysler side.

'FAIRLY CHEAP.' The combined company will have a strong balance sheet, low debt, and a pile of cash, according to Standard & Poor's equity research. Chrysler's operating performance has been strong: It reported on Nov. 3 that its October U.S. sales rose 20%, compared to October, 1997. Daimler-Benz also reported strong October sales from its Mercedes-Benz division in North America.

As far as valuation goes, analysts expect the stock to have a forward p-e of 11, which is high for Chrysler, but very low for Daimler-Benz, says David Healy, an auto analyst with Burnham Securities. "My inclination is that Chrysler is fairly cheap right now," he says.

Indeed, near-term pricing pressure is providing new investors a buying opportunity. As a German company, DaimlerChrysler was kicked off the S&P 500 Index. Merrill Lynch analyst Nicholas Lobaccaro wrote in an Oct. 28 report that he expects index funds to unload 74 million shares of Chrysler, equal to 4.7% of the combined company, before Nov. 16. According to his analysis, stocks taken out of the S&P 500 fall by an average of 6.23% up to the deletion date, but over the following week, they recover 2.91%.

"Once the merger is closed, that selling pressure will be gone," says Healy, although he concedes there may be some tax selling until the end of the year as well. He believes the stock will be trading higher early next year than it is now.

FEWER AGING AUTOS? Wall Street, however, is concerned about what lies beyond the next few months for the auto industry. Auto stocks were punished in late summer and early fall because of fears of a global slowdown. Now that those fears have abated, the stocks have recovered somewhat. But analysts remain concerned that consumer appetites for new cars could still stall because so many have already replaced their aging autos.

Lobaccaro believes that some future demand has been brought forward into this fall because new cars are so affordable and interest rates are so low. Although he thinks sales will stay north of the 15-million-vehicle rate for the next several months, "It would be unreasonable, in our view, not to expect a payback in early 1999," he wrote in an October report on the auto industry.

Healy thinks that a global economic collapse "seems less and less likely," however. And Stratton is still waiting for real evidence of a slowdown. He bought Chrysler at 32 in May of 1997 when Wall Street was concerned that it couldn't maintain such a strong sales pace. He says he will closely watch consumer spending and income levels in the U.S. and Europe. "If we saw consumer confidence collapsing or consumer incomes declining, we would be more cautious on all the autos," says Stratton. His fund has 4.1% of assets in Chrysler and 3% in Ford (F).

Meantime, Shapiro expects the new company to weather the cyclical swings of the auto sector. "This merger puts DaimlerChrysler in a long-term position to benefit" from globalization, he says. "In the short run there are question marks. But we don't buy stocks for the short run."

By Amey Stone in New York

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