What you can learn from the DaimlerChrysler debacle
By: Greg Caruso

In the heat of summer 1997, Daimler Benz purchased Chrysler for $37 billion in a reported business merger of equals. Now, not quite 10 years later, DaimlerChrysler is selling Chrysler for a reported $7.4b for 80% of the firm. If the loss of $30b in business value is not bad enough, apparently the entire purchase price being paid by the buyer Cerberus will be placed into Chrysler and not retained by Daimler. How did this happen and what lessons can you learn when planning the sale, merger, or valuation of your privately held business?

When Merging Or Selling A Business, it’s Business Profits, Not Sales Revenues

When Daimler purchased Chrysler, Chrysler was having record revenues of 61 Billion and net earnings of $2.8b. Revenues and profits were growing rapidly. Exciting new product lines were eagerly accepted by the market. The resulting projected cash flow would pay for the purchase.

Now, in 2007, Chrysler has revenues of $62b and a $1.5b loss with no projected growth and no current cash flow for financing. This proves one more time that cash flow is the basis of traditional companies' business value. To increase business value and business merger sales price, maximize your cash flow during the lead-up and sale period.

The Importance Of Business Cycles When Selling Or Merging

When Daimler bought Chrysler the auto industry as a whole was having record years. The three American automakers were selling cars like hotcakes. Costs had been brought down to where Chrysler was a low cost provider.

Compare that to the current industry weakness with reports of overcapacity, impending layoffs and inability to compete because of health care and retirement costs. Yes, the overall industry cycles do matter in the pricing of a business at the time of sale. Sell on the up-cycle. Up-cycles provide prospective purchasers with cash to buy your business and up-cycles provide your business with profits to sell.

Selling Period - Desperation Does Not Increase Price

When reports that Chrysler might be sold hit the street it was clear that Daimler was having a fire sale. Great for a buyer, but a very tough negotiating position for a seller. Don't wait until even the "business challenged" can tell you must sell. If you wait too long before you start the business sale or merger process the bottom feeders will win.

Maintain Your Core Strengths When Looking to Merge

When Daimler purchased Chrysler a new design center had been completed allowing Chrysler to bring cars on the market in three years or less. This allowed them to compete with stylish exciting cars. Daimler, in an effort to milk profits, did not bring out a new car for three years prior to 2006, destroying this design leadership position. People bought Chryslers because they were an affordable style, not because they lasted forever. So what was left when there were no new models?