DAIMLERCHRYSLER Analysts question merger's effect on revenue decline

One analyst says this serves as 'a prime example' of why big mergers fail.
KNIGHT RIDDER NEWSPAPERS
Led by a major but expected hemorrhage at the Auburn Hills, Mich.-based Chrysler Group, earnings at DaimlerChrysler AG plunged 90 percent in the second quarter, the company said.
While some analysts thought the parent company's performance would be worse, the struggles continued to raise questions about when shareholders might realize a benefit from the merger that created the company five years ago.
Chief executive officer Juergen Schrempp, during a conference call, stood by the union of Daimler-Benz AG and Chrysler Corp. that he masterminded in 1998 and blamed a difficult global economy for the challenges the company continues to face.
"We have a setback, admittedly," he said. "But I mean if you look at the trend, we are moving in the right direction. This problem has no effect whatsoever on our great strategy."
Burnham Securities auto analyst David Healy, however, called DaimlerChrysler's latest problems "a prime example" of why big mergers fail.
"Chrysler has had two earnings collapses since the merger," he said. "A lot of it is due to competitive pressures in the industry, but the integration of the companies envisioned at the time of the merger ... is just beginning to happen in a minor way."
Declining earnings
The German-American automaker reported Thursday that earnings in the second quarter declined to $125 million, or 13 cents a share, from $1.3 billion, or $1.27 a share, during the year-ago period. Revenue, meanwhile, fell to $39.5 billion from $45.2 billion last year.
The Chrysler Group, which makes Chrysler, Dodge and Jeep vehicles, was the only division to report a loss, and so largely caused the company's decline.
Operating profits at Chrysler plummeted, as the company previously warned, to a loss of $1.1 billion, primarily because of growing incentives and adjustments made to the residual values of dealer inventories. Revenue at Chrysler dropped to $13.6 billion from $18.9 billion.
DaimlerChrysler's overall results were better than expected, though.
Still, the outlook remains precarious for the Chrysler Group, which had bounced back briefly from a $4.7 billion operating loss in 2001 to earn $639 million last year.
The unit is still projecting a slight operating profit this year, which would help parent DaimlerChrysler achieve its projected operating profit from ongoing business of $6 billion this year. The company had an operating profit of $7.2 billion in 2002.
However, Chrysler Chief Executive Officer Dieter Zetsche, who earlier this year announced an extra $1 billion in cost-cutting at the company, expressed reservations about meeting that target.
"We are striving for a slight profit but saying at the same time that we are seeing substantial risks," said Zetsche, who also continued to lament incentive pressures in the industry.