Zetsche feared takeover without sale of Chrysler

Paul Cox / Special to The Detroit News

"Top performance is the best protection against potential threats, and that applies for DaimlerChrysler as well," says CEO Dieter Zetsche, at the Geneva Motor Show. See full image

Christine Tierney / The Detroit News

GENEVA -- As DaimlerChrysler AG's top management weighed a possible sale of the Chrysler Group last fall, two events weakened Chrysler's prospects: its performance slumped, and the United Auto Workers union refused to give Chrysler the health care concessions it extended to the automaker's larger Detroit rivals.

But for the first time Tuesday, DaimlerChrysler CEO Dieter Zetsche alluded to other pressures bearing on the Stuttgart, Germany-based automaker -- the risk of a possible takeover of the company.

"In today's world, a 50 billion euro ($65 billion) market cap doesn't protect you from those considerations," he said in his first wide-ranging talks with reporters since the stunning Feb. 14 announcement that the nine-year merger might be dissolved.

"In the case that the current market capitalization of DaimlerChrysler doesn't represent the potential value of the group -- and I'm convinced that this is the case -- this of course triggers the interest of third parties to investigate if they're able to unlock hidden or undeveloped value," Zetsche said at the Geneva motor show.

Financial experts agree that DaimlerChrysler could be a takeover target because its stock market valuation has been weighed down by Chrysler's uneven performance. The automaker was protected in past years by its largest shareholder, Deutsche Bank, but the bank has reduced its stake and wants to shed its remaining 4.4 percent DaimlerChrysler holding.

"Potentially, they are a takeover target," said Juergen Pieper, an analyst at Metzler Bank, based in Frankfurt. He estimates DaimlerChrysler's assets are worth $30 billion more than its combined stock value. "If you split it up, you can generate value. Mercedes is one of the great brands of the world."

No option ruled out

Zetsche declined to discuss any negotiations regarding Chrysler, saying the first priority was to deliver on the restructuring plan announced last month. He reiterated that no option, including keeping Chrysler, had been ruled out.

Financial analysts who saw Zetsche last week in meetings in London, New York and Boston said he would not discuss sale or spinoff plans with them, but they came away with the impression that DaimlerChrysler's preferred option would be a sale of Chrysler.

General Motors Corp. and DaimlerChrysler are in talks about a possible sale of Chrysler to GM, people familiar with the discussions have told The Detroit News. But Zetsche would not confirm that sale talks were under way.

"I can confirm that nine months ago or more, some discussions between the Chrysler Group and GM -- I think initiated by GM but this doesn't matter -- took place to discuss some potential common interests in some segments. I think large SUVs were discussed. Beyond that, I can't confirm anything," said Zetsche, who ran Chrysler for nearly five years.

On Monday, a team from Cerberus Capital Management met with Chrysler officials in Auburn Hills to discuss a possible bid for the company, say people familiar with the discussions. Representatives of the Blackstone Group, a large private equity firm, are to arrive as early as today.

Pressure rose in Germany

Over the past year, soon after he became CEO of the DaimlerChrysler group on Jan. 1, 2006, Zetsche came under mounting pressure from investors and various constituencies on the German side of the company, including labor representatives, to get rid of Chrysler. Their frustration increased after Chrysler announced in July that it would lose money in the third quarter, then revised its forecast in September to a loss more than double its previous estimate.

As DaimlerChrysler was conducting its annual review of all the divisions, Chrysler's performance deteriorated as inventories of unsold vehicles ballooned. The other disturbing development was "the stance the union took, which was quite surprising, in saying that what we granted GM and Ford, we'll not grant Chrysler," Zetsche said.

Those weren't the decisive factors in the decision. "But I have to concede that those developments were part of our considerations."

Signs of an internal debate seemed to emerge in late October, when DaimlerChrysler's chief financial officer, Bodo Uebber, said during the third-quarter results teleconference that all options were under consideration for Chrysler. It had posted a $1.5 billion quarterly loss. The company issued a statement that night stating that Chrysler was not for sale.

Zetsche said Uebber's comments were misinterpreted, but many industry experts in Germany question whether his comments could be a slip of the tongue.

"Those remarks were placed there to open the discussion about DaimlerChrysler," said Willi Diez, who heads the Auto Industry Institute near Stuttgart. "At that time, it was a surprise because everyone was quite sure that Dieter Zetsche didn't want to separate Daimler and Chrysler because he was committed to Chrysler."

Zetsche on thin ice?

Some industry analysts say Zetsche's own position at the head of DaimlerChrysler might have been weakening. Many of the German labor representatives resented deep job cuts at DaimlerChrysler in Germany. Labor representatives make up half the supervisory board -- and they feel less loyal toward Zetsche than toward his predecessor, Juergen Schrempp.

Deutsche Bank also wants to see the stock rise.

"Zetsche's pressure comes from so many different constituencies telling him they're sick to death of Chrysler," said one analyst.

Zetsche said he was not seeking another shareholder to replace Deutsche Bank and act as a protector. Germany's other two big carmakers are effectively protected against takeovers by their leading shareholders.

"I believe protection usually is not the best environment for top performance, but the other way around. Top performance is the best protection against potential threats, and that applies for DaimlerChrysler as well."

Zetsche said the management's decision to consider all options for Chrysler was not due to outside pressures.

"The (DaimlerChrysler) AG management and the Chrysler management is not acting in reaction to pressure but in reaction to its own thinking and its own strategic process," he said.

He stressed that the process didn't take place only in Stuttgart and that Chrysler CEO Tom LaSorda was involved early on.

Said Zetsche: "A small, select group of the AG board, and definitely nobody of the supervisory board, took on this task to understand where we are, what the going-forward process should be, and ultimately deciding to look at further options as well."

When asked whether Chrysler might be sold in pieces, Zetsche declined to answer directly. But he noted that Chrysler is "a very integrated unit."