Negotiation Report

Submitted in partial fulfilment of the requirements of the course

Mergers, Acquisitions and Corporate Restructuring

(2019-20)

INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD

Instructor: Prof. Prem Chander

Prof. Sobhesh Agarwalla
Academic Associate: Venus Rais
By:
Group 7
Anish Wahi (18308)
Ashok Suresh Das (18219)
Mohil Jain (18438)
Pavitra Garg (18445)

Date of submission: November 19, 2019

Contents

Company Strategy .................................................................................................................................. 3

Industry Trends....................................................................................................................................... 4
Financial Performance Analysis ............................................................................................................. 5
Key Takeaways ................................................................................................................................... 6
Benefits of Merger ................................................................................................................................. 6
Synergy Valuation .................................................................................................................................. 7
Company Valuation ................................................................................................................................ 7
 Company Strategy
Started in 1920 by Walter P. Chrysler, Chrysler Corporation is currently the third largest motor
vehicle manufacturer in the United States, behind Ford and GM. By focusing on innovation
and by building a portfolio of highly successful and iconic car brands such as Dodge and Jeep,
the company has withstood severe economic stress and fierce competition from domestic
and international rivals on several occasions. Spurred on by intense competition and the
highly cyclical nature of the automotive industry, Chrysler Corporation has developed a
resilient competitive strategy - dramatically reducing product development costs, thereby

Close
relationship
w/
suppliers;
Low R&D
Low cost High
Production Speed-to-
Cost market

Limited Horizontal Presence in

vertical org segments
integration structure for w/ high
to parallel, demand &
minimize frictionless margin
fixed costs developmen

Frequent Focus on
product Low and
launches Mid-
Segment
Feature
packed
vehicles -
not
timeless
luxury

increasing speed-to-market. The company’s strategy can be better understood through the
following activity system map:
Chrysler in 1998 is a demand responsive company which updates and launches new car and
truck models very frequently in order to meet the needs of the American masses. This enables
Chrysler to be present in the most profitable segments of the market with the strongest
consumer demand. The company meets this objective by dramatically reducing the time and
cost of new product development. Integrated platform teams for each automobile type
minimize frictions between functional divisions like research, design, production, marketing,
and finance. Cost of development is further reduced through efficiency improvements and
close collaboration with suppliers through the SCORE (Supplier COst Reduction Effort)
programme.

Frequent product changes create a strain on managerial bandwidth and reduce economies of
scale for large investments, therefore Chrysler has held back from vertical integration, and
continues to source 75% of its components from external vendors. These suppliers are seen
as another source of innovation and information about the latest trends, and are encouraged
to participate closely in the product development process. Chrysler has carefully chosen
market segments which are most receptive to such innovations, and caters predominantly to
mid-market customers. It holds a dominant position in the American truck market, and
controls 47% of the market for family minivans.

Industry Trends
Competition from increasingly ‘globalized’ manufacturers has pushed Chrysler to follow suit.
The company has focused on Latin American markets for international sales growth and
collects 8% of its annual revenue from international shipments. It has a very modest presence
in Europe (0.7% market share), owing to a thin sales network and the limited suitability of its
product portfolio for the European market. Industry forces, as analyzed below, put
considerable pressure on niche manufacturers like Chrysler to expand their geographical
presence and their product portfolio.

A. Bargaining Power of Buyers: High. Consumers in developed markets have access to a wide
variety of cars from various manufacturers. There are no switching costs involved in
switching from one manufacturer to another.
B. Threat of Substitutes: Moderate. Public transport poses a threat of substitution.
C. Competitive Rivalry: High. Innovative international manufacturers like Toyota have
transformed the passenger car industry by simultaneously offering low cost and high
quality products – effectively expanding the efficiency frontier.
D. Regulatory Oversight: High. Policy push for manufacturing in several developing countries
provides competitive advantage to global manufacturers who are able to capitalize on
these incentives. Regulators also limit access to international markets by imposing import
duties, and political pressures resisting closure of plants and layoffs have led to global
overcapacity.
E. Bargaining Power of Suppliers: Low. International manufacturers are able to source
materials from a global supply chain and also receive volume discounts due to their large
volume requirements. Therefore, cost control and economies of scale are becoming
increasingly important drivers of profitability.

Financial Performance Analysis

Chrysler and Daimler both are financially sound companies which is reinforced by the
comparison of their key financial ratios:

Chrysler
1995 1996 1997
Activity Ratios
Inventory Turnover Ratio 8.57 9.23 9.58
Working Capital Turnover Ratio 4.84 5.51

Liquidity Ratios
Current Ratio 1.90 1.64 1.56
Quick Ratio 1.61 1.35 1.31

Solvency Ratios
Debt to Equity Ratio 1.30 1.16 1.36
Interest Coverage Ratio 4.47 7.05 5.53

Profitability Ratios
Gross Profit Margin 12.53% 15.33% 13.51%
Operating Profit Margin 8.35% 11.56% 9.10%
Net Profit Margin 3.81% 5.75% 4.59%
ROA 6.42% 4.81%
ROE 31.33% 24.46%

Daimler
1995 1996 1997
Activity Ratios
Inventory Turnover Ratio 7.77 6.10 7.77
Working Capital Turnover Ratio 0.35 0.51
 Liquidity Ratios
Current Ratio 2.13 2.06 2.16
Quick Ratio 1.53 1.54 1.70

Solvency Ratios
Debt to Equity Ratio 0.97 1.09 1.12
Interest Coverage Ratio -5.11 3.28 5.59

Profitability Ratios
Gross Profit Margin 1.17% 6.57% 7.68%
Operating Profit Margin -7.93% 1.38% 2.93%
Net Profit Margin -5.56% 2.60% 6.51%
ROA 2.58% 6.48%
ROE 11.24% 26.29%
Key Takeaways
• Both the firms enjoy same inventory turnover ratio
• Daimler is marginally more liquid than Chrysler, however, both the companies have
sufficient liquidity cushion
• Except FY 1995 where Daimler had negative income, both the companies have
requisite interest coverage and the debt-equity ratio of less than 2 depict that both
the firms have capacity to raise more debt if required
• Chrysler has much better profitability at operational level which Daimler can benefit
from if both the firms merge.

Benefits of Merger
Benefit Details
• Chrysler can benefit from DB engineering and use
Strengthen Foothold in components, small engines to build small cars suitable
Europe for European Market
• Chrysler can benefit from sales network
• R&D budget of Daimler is manifolds greater than Chrysler
First-class DB Engineering
• Scope of improvement in quality and hence, brand image
• Chrysler’s cars belong to medium to low price category
Broaden Luxury Segment currently, it can enter significantly into luxury, high price
segment with Daimler brand name
• Gives European manufacturing base
Product Capacity
• Better utilisation of excess capacity lying with both the
Optimisation
companies
• Both companies can share the sales and distribution
network
Distribution Network
• Chrysler will benefit more as 93% of its sales comes from
North America
Synergy Valuation
FY 1999 FY 2000 FY 2001
Cost Savings $1.4 Billion $2.05 Billion $3.0 Billion

Value of Synergy- $39.18 Billion

Assumptions-

• Terminal Growth rate is assumed as 2.58%, which is the average US inflation of the last 7
years.
• For a conservative estimate the WACC of raising funds in US and Germany both was
considered and the higher among the two was selected.
• The WACC used is 9.35%, assuming that the company raises funds in US and using a less
levered capital structure similar to Chrysler with 18.6% debt.
• The debt of the new company is considered to be A rated, given that both Daimler’s and
Chrysler’s bonds were given A rating.
• The beta asset was taken as the average of comparable asset betas in US and the cost of
debt was taken as 6.3%, which was the yield of A rated bonds in US.

Company Valuation

Chrysler Corporation
Discounted Cash Flow Valuation
(values in $ millions)
Projected
Discounted Cash Flow Analysis: 1998 1999 2000 2001 2002
WACC Method
Net income $3,037.0 $3,291.1 $3,582.1 $3,883.8 $4,201.1
Interest expense 1,002.7 929.1 815.9 706.8 595.2
Tax effect of interest expense (385.0) (356.8) (313.3) (271.4) (228.6)
After-tax interest expense 617.6 572.3 502.6 435.4 366.7
Net Operating Profit After Tax 3,654.6 3,863.4 4,084.7 4,319.2 4,567.7
(NOPAT)
Depreciation 3,194.7 3,406.7 3,631.4 3,869.7 4,122.2
Amortization 39.3 38.3 37.4 36.4 35.5
Deferred taxes 1,537.2 1,029.0 702.2 492.9 359.4
Minority interest 0.0 0.0 0.0 0.0 0.0
Income from affiliates 0.0 0.0 0.0 0.0 0.0
Other noncash items 0.0 0.0 0.0 0.0 0.0
Changes in net working capital 2,676.0 (182.3) (193.2) (204.8) (217.1)
(NWC)
Cash flow from operations 11,101.8 8,155.1 8,262.5 8,513.4 8,867.8
Capital expenditures (4,000.3) (4,240.3) (4,494.7) (4,764.4) (5,050.3)
Other 0.0 0.0 0.0 0.0 0.0
Free Cash Flow 7,101.6 3,914.8 3,767.8 3,749.0 3,817.5
Terminal value (perpetuity) 0.0 0.0 0.0 0.0 59,696.5
Total Free Cash Flows to $7,101.6 $3,914.8 $3,767.8 $3,749.0 $63,514.0
Capital Providers

Valuation 1998 1999 2000 2001 2002

Firm value 56,227.38 54,297.19 55,178.59 56,432.34 57,957.75
Plus: excess cash 2,848.00 3,318.88 3,818.01 4,347.09 4,907.92
Less: debt outstanding 15,485.00 15,107.13 13,270.64 11,561.54 9,856.30
Less: minority interest 0.00 0.00 0.00 0.00 0.00
Less: preferred stock 0.00 0.00 0.00 0.00 0.00
Equity value 43,590.38 42,508.94 45,725.97 49,217.89 53,009.37
Value per Share, Beginning of Year 64.53 70.28 75.60 81.37 87.64