DaimlerChrysler has finally found a fool-proof way to make its long-languishing share price jump 10 per cent at a stroke – fire the CEO. That won’t be much consolation to Dieter Zetsche when he takes the helm at DaimlerChrysler on New Year’s Day 2006 and he contemplates the in-tray of problems bequeathed to him, and it must leave a bitter taste in the mouth of the late and unlamented chief executive Juergen Schrempp. Neil Winton reports.
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Schrempp had been expected to soldier on until his contract expired in 2008, despite a string of missteps which had tainted his regime and soured global investors.
But late in July, to the astonishment of investors and the industry, Schrempp said he would step down and hand over to Zetsche.
Immediately, investors were dancing in the streets.
“Schrempp finally lifts Daimler Stock. After a Decade of Blunders, Quitting Does the Trick,” said the Wall Street Journal’s “BreakingViews” column.
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By GlobalDataAfter the news hit stock markets, DaimlerChrysler’s share price soared 10 per cent, slipping back to an 8.7 per cent gain at the end of the day.
The Financial Times’ Lex column was equally brutal.
Neutron Juergen
“Juergen Schrempp was once known as “Neutron Juergen”. Given his ability to destroy value, but keep his position, the nickname is appropriate,” Lex said.
“After years of evading responsibility for a string of management misjudgements, from the souring of relations with Mitsubishi and Hyundai, to record losses at Mercedes, Mr Schrempp bowed to shareholder pressure,” the FT said in a story headed “Daimler chief’s bumpy ride draws to a close”.
The most visible wreckage of the Schrempp years is the market capitalisation of the company, which has halved since Daimler bought Chrysler in 1998. Just before Schrempp piloted the merger with Chrysler, a deal he later acclaimed as a “marriage made in heaven”, Daimler was worth just over 80 billion euros on the stock market. Now, including Chrysler, the market capitalisation is barely 40 billion euros.
Trashing of Mercedes
The string of blunders which caused the share price to slide includes the trashing of luxury brand Mercedes’, which has turned from being a virtual license to print money, into a flawed brand, its reputation for rock-solid reliability seeping away. In 2005’s second quarter Mercedes net income dived 98 per cent to barely breaking even at 12 million euros. In March 2005, Schrempp claimed that problems with Mercedes had been solved. A month later Mercedes announced a recall of 1.3 million cars, its largest ever.
The alliance with Mitsubishi Motors collapsed last year. The attempt to build city cars through the new Smart brand has lost a total of more than 3 billion euros since its birth, according to Lehman Brothers, which reckons that Smart will have cost DaimlerChrysler over 5 billion euros by 2007.
Investors had high hopes when Schrempp took over. He was seen as a new kind of German corporate leader, more of an Anglo-Saxon type, straight forward and aggressive in business matters and concerned about the bottom line and shareholder value.
Hero to zero
The U.S. magazine Business Week lauded Schrempp in 1998, saying he was an exciting risk taker; Germany and Europe could use lots of corporate leaders like him. It talked about Schrempp’s love of mountain climbing, safari expeditions, and parties.
In 2003, Business Week named him worst manager of the year.
One thing puzzling investors is what triggered Schrempp’s exit, given that he had ridden out many fierce storms in the past. His support on the board had been rock solid, with major investors like Deutsche Bank and Kuwait apparently happy with his leadership. The latest results for 2005’s first half weren’t great, but contained nothing to trigger a sudden exit at the top.
Why now?
The terms of Schrempp’s departure are puzzling too. He will not draw a salary for the rest of his contract. Apparently there’s been no massive compensation payout. He isn’t being kicked upstairs to join Daimler’s supervisory board. Several major German firms, like VW, have recently uncovered scandals concerning their top management, but there hasn’t been a breath of a rumour that this might be happening at DaimlerChrysler.
Meanwhile, investment bankers are desperate to find out what kind of regime will result from Zetsche’s leadership.
Nothing much will change
Opinions amongst investment bankers are mixed, although most agree that he is the best candidate for the job, and are impressed with his performance as CEO at Chrysler, both in terms of the company’s performance, and the way his relaxed personality charmed workers and the public. And anybody wearing a walrus moustache like that can’t be as egocentric as Schrempp.
But Sanford Bernstein analyst Stephen Cheetham isn’t hopeful.
“We do not believe his appointment materially changes our view of the company’s normal earnings power, and the largest of sacred cows – the group’s value-destroying conglomerate structure – is unlikely to be slaughtered near term,” said Cheetham.
Citigroup Smith Barney agreed.
“Despite a keenly welcomed change in management, DaimlerChrysler is likely to change little immediately. Dr Zetsche may boost capital disciplines after the value-destruction marring Prof Schrempp’s tenure, but the structure of the group cannot quickly change,” Citigroup said.
“People’s choice”
Morgan Stanley was bit more positive. “Zetsche is the strongest replacement we could have imagined. The decision to replace Schrempp was a surprise to us, and removes one of the biggest barriers to investor interest in the stock. Zetsche is the “people’s choice” and has led a successful restructuring-led product reviving turnaround of the Chrysler division,” Morgan Stanley said in a report.
Morgan Stanley expects more management heads to roll at DaimlerChrysler, as the new regime beds down.
This was apparent soon after the announcement of Schrempp’s departure, when Mercedes chief Eckhard Cordes offered his resignation. The offer has since been accepted by the supervisory board and he leaves on August 31, replaced by Zetsche. Cordes was a close ally of Schrempp and one of the few who backed his policy on Mitsubishi Motors. Wolfgang Bernhard was the heir-apparent for the Mercedes job until he fell out with Schrempp over Mitsubishi. Bernhard is now heading the VW brand under group CEO Bernd Pischetsrieder.
Lehman Brothers was ecstatic at the news of Schrempp’s defenestration, which it called a “revolution”, and even allowed itself the dream of many DaimlerChrysler investors since 1998, that Chrysler would be sold off.
Breakup on the cards
“After decades of CEOs focussed on expansionism over returns, the Supervisory Board made a U-turn in appointing a modern CEO with a highly visible focus on earnings and shareholder returns. This significantly affects the outlook. Divestments – perhaps even break-up – may now be on the agenda,” said Lehman Brothers.
Citigroup doesn’t think this is a runner, not least because the 14.2 billion euros in healthcare liabilities and 3 billion of pension under-funding exceeds the value of Chrysler operations.
“A walk-way strategy from Dr Zetsche, who has twice nursed Chrysler back to profit, is also barely conceivable,” Citigroup said.
Smart
Everybody in the investment banking world though seems agreed on the need to take vigorous action to sort out Smart, with some saying the only way to solve its problems is to kill it.
“The haemorrhaging at Smart is set to continue we believe into the second generation of the ForTwo from 2007 onwards while sales of the ForFour continue to slump. (The ForFour is built in the Netherlands by Mitsubishi Motors’ NedCar subsidiary.) The closure option needs to be revisited, we believe. This would send the strongest possible signal that Dr Zetsche is serious about changing the culture at DaimlerChrysler,” said Merrill Lynch.
The Wall Street Journal’s “BreakingViews” agrees, and some. “Zetsche comes with a good reputation after he turned around Chrysler. He’s not yet said what his plans are for the group. But top on his list should be to reclaim Mercedes’ lost reputation; sell loss-making Smart; and beyond that rationalise Daimler’s muddled group structure, which includes trucks, aerospace, financial services and a 30 per cent stake in defence group EADS,” it said.
Neil Winton
