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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: How do you benchmark yourself?
Q: Do you consider yourself a car guy?
Q: What is your vision for DaimlerChrysler?
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?
Q: How does the merger impact the auto industry?
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?
Q: How do you describe your management philosophy?
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?
Q: You will have the German system of co-determination [with labor representatives
on the supervisory board] in DaimlerChrysler...
Q: Will your relationship with labor change once a member of the United Auto Workers
also sits on your supervisory board?
Q: The Smart [city car launched in October] is not doing so well.
Q: When do you expect Chrysler passenger cars to make money?
Q: What is the difference between the Daimler and Chrysler cultures?
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?
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.
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?
Q: So after three years, the organization could be more streamlined?
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.
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