This is a short academic presentation on 'Cerberus Capital Management Acquires Chrysler Corporation' which is a case study on financing transactions.

1. Cerberus Capital Management Acquires Chrysler Corporation
-A Case Study on Financing Transactions

2. Content
Case Summary
Discussion Questions & Answer

3. 80.1 %
19.9%
Cerberus Capital Management Acquires Chrysler Corporation

4. Case Summary
Purchase Price by Cerberus to Acquire
Chrysler- $7.4 Billion in Cash
$1.35 Billion – goes to Daimler
$5 Billion – in Auto Manufacturing
Operation
$6.05 Billion – invested in Chrysler
$1.05 Billion – in Finance Unit

5.  Daimler also agreed to pay $1.6 billion to cover Chrysler’s long term debt,
between four month before signing the contract.
 Cerberus also assumed responsibility for $18 billion unfunded retiree pension
and medical benefits.
 Daimler also agreed to loan Chrysler Holding LLC $405 billion.
 The estimated liability and uncertain cash flow made the borrowing impractical.
 Cerberus invested its own fund in the business.
 Cerberus was counting on paring the liability with United Auto Workers (UAW).
 By transferring responsibility for these liabilities to the UAW, Chrysler
believed that it would be able to cut in half the $30 dollar per hour labor cost
advantage enjoyed by Toyota.
 Cerberus expected to benefit from melding Chrysler’s financing unit with
Cerberus’s 51% ownership stake in GMAC.
 GMAC had a commercial banking status to be able to borrow directly from U.S.
Federal Reserve.
 In late 2008 U.S. Treasury purchased $6billion in GMAC stock.
 To avoid for being classified as a bank holding under government supervision it
sold it shares 14.9% of voting stock and 33% of total equity.
 In early 2009, Chrysler entered into negotiations with Italian auto maker Fiat
to gain access to the firm’s technology in exchange for 20% stake in Chrysler.
Case Summary (Continued)

6. Discussion
Questions

7. What were the motivations for this deal from Cerberus’s
perspective? From Daimler’s perspective?
Question-1

8. Creating alliances with other
entities
Spreading much of the acquired
risks around, including retiree
health-care liabilities
Benefitting form economies
of scale and scope
Eliminating duplicate jobs and
combining those with potential
overlap.
Motivation for the Deal from
Cerberus’s Perspective

9. Willingness to take on
responsibilities to make the
alliance happen
Choosing to remain with
the stake of equity
Belief that firm would continue to do well and it
wanted to stay on and ride with the bounces
Motivation for the
Deal from Daimler's
Perspective

10. What are the risks to this deal’s eventual success? Be specific.
Question-2

11. Presence of a Very Sizable
Debt
Uncertainty Regarding
Future Cash Flows
Borrowing from the Federal
Government
Risks to this Deal’s Eventual Success

12. Cite examples of potential economies of scale and scope.
Question-3

13. By transferring liability
responsibility to UAW, Chrysler
would be able to enjoy labor cost
advantage
Cutting cost by eliminating
duplicate jobs, combining
overlapping jobs functions and
combining back office operations
Economies of
Scale

14. Using existing data centers to
increase the number of
possible loans it could
generate.
Funding from the Federal
Reserve might be able to provide
cheaper loan services to its
customers and potential
customers
Economies of
Scope

15. Cerberus and Daimler would own 80.1 percent and 19.9 percent
of Chrysler Holdings LLC, respectively. Why do you think the
two parties agreed to this distribution of ownership?
Question-4

16. 80.1%
19.9%
Cerberus
capital
Management
Daimler
Distribution of Ownership

17. Reasons for Agreeing to the Distribution of Ownership
Cerberus wanted to call the shots and this
percentage ownership allowed it to basically
be in control of all moves going forward.
Cerberus seemingly had the capacity to fully
absorb the acquisition costs while Daimler chose
to remain with its stake of equity.
Additionally, this kind of a deal was a typical of
private takeovers, which allowed private equity
owners to use either the target’s assets or cash
flow to use as collateral.

18. Which of the leading explanations of why deals often fail to
meet expectations (i.e., tendency to overpay, slow integration,
and bad business plan) best explains why the combination of
Daimler and Chrysler failed? Explain your answer.
Question-5

19. Being the minority shareholder, Daimler’s efforts
and decision-making seemed stifled
Estimated Size of
Chrysler’s Retiree health-
care Liabilities
Uncertainty of Future
Cash Flow
Reasons for the Failure of the
Combination of Daimler and
Chrysler

20. The new company, Chrysler Holdings, is a limited liability
company. Why do you think Cerberus chose this legal structure
over a more conventional corporate structure?
Question-6

21. Reasons for Choosing Limited Liability Company Structure over the
Conventional Corporate Structure
Keeping the New Firm Separate from its Main
Operation (Capital Management)
Having Tax Flexibility for
LLC Structure
Having Limited Liability over
Debt for Owners
Reasons

23. Prepared by -
Md. Kamran Hasnain