DaimlerChrysler to Buy 34% Stake in Mitsubishi
DaimlerChrysler announced early today that it is acquiring 34% of Japan’s Mitsubishi Motor Corp. to give the German-American giant a vital stake in the Asian market and elevate it to the third-largest auto maker in the world.
The acquisition, for which the Stuttgart-based DaimlerChrysler will pay $2 billion, was announced in a statement issued before the Frankfurt Stock Market opened. It said DaimlerChrysler Chairman Juergen Schrempp and Mitsubishi President Katsuhiko Kawasoe had signed a letter of intent in Stuttgart to work together on design, development, production and distribution of passenger cars and light commercial vehicles.
The fate of Orange County-based Mitsubishi Motor Sales of America, the company’s U.S. import and distribution unit, and its main U.S. factory in Normal, Ill., has not been addressed.
DaimlerChrysler is expected to have control over Japan’s fourth-largest auto maker, with veto rights over management decisions of the heavily indebted partner, according to industry analysts familiar with the deal.
Executives from both companies were expected to offer greater detail later in the day.
The deal would breathe new life into a Japanese auto maker that has suffered substantial financial setbacks in recent years.
At the outlined price, DaimlerChrysler would pay about 60% more than the $1.29 billion stock market value of the Mitsubishi stake, based on Friday’s closing price, according to Bloomberg News.
But analysts said the price premium apparently is insurance for DaimlerChrysler that it can restructure Mitsubishi relatively quickly without creating too much ill will. With its tradition of lifetime employment and close company relationships, Japan tends to move much less decisively than its Western counterparts in turning companies around.
A decade ago, the idea of foreigners purchasing a controlling stake in such a strategic Japanese industry would have been unthinkable. But Ford paved the way several years ago with its controlling stake in Mazda. Renault more recently gained control of Nissan, and General Motors has taken shares in Isuzu, Suzuki and Subaru.
As outlined, Mitsubishi Motors gains through DaimlerChrysler a cash infusion and deep pockets for its future development. The company has debts of $16.69 billion, and its relatively small size makes it increasingly vulnerable in an industry where bigger seems to be better.
The German car maker, for its part, gains a long-sought tire-hold in the Japanese and East Asian markets. It also gains more heft, which should help it reduce costs. And it gains small-car expertise, an area in which it is relatively weak.
Analysts say making the combination work will be a challenge, and Volvo’s 5% stake in Mitsubishi must be finessed. Volvo and DaimlerChrysler are archrivals in the European truck market, said Steven C. Usher, an analyst with Jardine Fleming Securities.
DaimlerChrysler will have to work hard to integrate the more gentle Mitsubishi corporate culture with DaimlerChrysler’s hard-driving approach. That said, compared with the challenge Renault faces turning around Nissan, DaimlerChrysler is in better shape because of Mitsubishi’s more efficient supplier network and fewer sticky cross-shareholder relationships.
Another key challenge for Mitsubishi will be to cut back its current 12 vehicle platforms by more than the half it has pledged to trim. “Otherwise, cost savings won’t be realized,” said Kenji Tanaka, an analyst with Okasan Securities.
DaimlerChrysler sells 4.9 million vehicles a year, while Mitsubishi Motors sells 2 million. Together, the new group would rank third globally behind GM and Ford and ahead of Toyota Motor Corp.
Cypress-based Mitsubishi Motor Sales of America, the company’s U.S. import and distribution unit, is one of its strongest arms these days. Sales of Mitsubishi vehicles in the U.S. are up more than 60% in the last year on the strength of redesigned cars such as the mid-size Galant sedan, Montero Sport SUV and Eclipse sports coupe.
The U.S. company was founded more than 20 years ago. Its Cypress campus includes Mitsubishi’s U.S. advanced design studio.
Although once in a deep slump and awash in red ink, the U.S. company has made a comeback under former General Motors Corp. executive Pierre Gagnon, who became executive vice president and chief operating officer in 1997.
In the past two years, Mitsubishi Motor Sales has consolidated its marketing efforts, pushed a message of quality, edgy style and competitive price, and won new market acceptance.
“The is a logical continuation of the trend of consolidation in the auto industry,” said Herbert Tay, who heads consulting giant A.T. Kearney Inc.’s West Coast automotive practice in Costa Mesa. “It’s a good thing from both parties’ points or view.”
Williams reported from Berlin and Magnier from Tokyo. Hisako Ueno of the Tokyo Bureau and John O’Dell in Orange County contributed to this report.
