Case 5: Chrysler

Ratio Analysis

Chrysler is one of the "Big Three" automobile manufacturers in the United States, headquartered
in Auburn Hills, Michigan. The original Chrysler Corporation was founded in 1925 by Walter
Chrysler from the remains of the Maxwell Motor Company. In 1998, it was acquired by Daimler-
Benz, and the holding company was renamed DaimlerChrysler. Before Chysler merged to become
DaimlerChrysler AG, they were presented with a takeover bid of $55 per share by MGM
billionaire Kirk Kerkorian owner of Tracinda Corp  and former Chrysler chairman Lee Iacocca.
Kirk Kerkorian was a stockholder in Chrysler and an experienced takeover financier who
apparently found Chrysler to be a good buy. With 36 million shares of Chrysler's stock, an
estimated 10 percent holding valued at nearly $2 billion, he remains Chrysler's largest
shareholder. .Chrysler rejected the offer, however, stating that the firm was not for sale. Further,
many Wall Street experts felt that Kerkorian could not come up with the $20 billion necessary to
complete the deal. Some analyst believe that Kerkorian's plans also went awry because he
seriously underestimated the willingness and ability of his prey to fight back. Chrysler actively
opposed the buyout proposal by using its relationship with investment banks to make it difficult
for Kerkorian to get financing, analysts said.

In the nearly five years that he has been Chrysler's largest shareholder, Kerkorian has claimed
that his major objective was to increase the value of the company for all of Chrysler's investors.
He repeatedly has chided the company's management for being too fiscally conservative and for
holding what he sees as too much cash in financial reserves. One of the key factors in this effort was
the extraordinary $7.5 billion cash reserve Chrysler had built up during the economic expansion of the
early 1990s. Chrysler management had taken the position that it needed this reserve to weather the
next recession so the firm would not have to sell assets or slow R&D spending during the downturn.
Kerkorian argued that this cash hoard was far in excess of required cash reserves and should be
returned to the shareholders. By announcing their leveraged buyout bid, Kerkorian and Iacocca
hope to return some of this excess to shareholders and recoup some of the loses shareholders
experienced when Chrysler stock plummeted from a high of $63.50 per share in January 1993, to
a pre-bid price of only $39.25.

Far from dissatisfied with the performance of Chrysler management or Chairman Robert Eaton,
Iacocca’s hand-picked successor, Kerkorian and Iacocca in Chrysler were merely disappointed
that Chrysler’s stock price had failed to reflect the dramatic turnaround in Chrysler’s fortunes.
Since taking the helm in 1992, Eaton had guided Chrysler through tricky new product
introductions for its flagship Jeep and minivan brands, pared debt, and boosted return on equity
to a sparkling 30%+. Kerkorian is also worried that a cash-rich company runs the risk of
being careless. The company may fall prey to sloppy habits including inadequate
control of spending and an unwillingness to continually prune growing expenses.
large cash reserves tempt them to invest in bad projects Large cash holdings also remove
some of management's pressure to perform and it allow inept managers to protect their
jobs during a downturn, rather than find more efficient ways to run the company.
Not only this but the company has been unsuccessful to appropriately report problems with its
cars as required by regulation. The TREAD Act needs automobile businesses to notify NHTSA
every three months of mishaps that caused injuries or deaths. It also demands notification of
mechanical troubles. In July, Chrysler agreed to pay a record $ one hundred and five million to
settle charges by NHTSA that it had mishandled 23 individual recollects. The data is intended to
be analyzed by both the automaker and regulators to decide no matter whether flaws in the cars
are the trigger of the mishaps and regardless of whether or not a recall need to be ordered.

After Chrysler rejected Kirk Kerkorian's bid of $55 per share, Kerkorian decided to have his
people repeat the analysis of the firm's financial performance over the two most recent years to
determine if he should increase his bid in this friendly takeover attempt. To measure the financial
performance of Chrysler over the past two years, key financial ratios will have to be computed
and compared with industry averages. To help in this endeavor, Chrysler's financial statements
are found on the following pages.

Chrysler Corporation's Balance Sheet

for the year ending December 31 (in millions)
Assets This Year Last Year
Current Assets
Cash and cash equivalents $ 5,543 $ 5,145
Marketable securities $ 2,582 $ 3,226
Accounts receivable $ 2,003 $ 1,695
Inventories $ 4,448 $ 3,356
Prepaid taxes $ 985 $ 1,330
Finance receivables $13,623 $12,433
Total Current Assets $29,184 $27,185

Property & equipment $20,468 $18,281

Less: Accumulated Depreciation $ 7,873 $ 7,208
Net Plant & Equipment $12,595 $11,073
Other Assets
Special tools $ 3,566 $ 3,643
Intangible assets $ 2,082 $ 2,162
Deferred tax assets $ 490 $ 395
Other assets $ 5,839 $ 5,081
Total Assets $53,756 $49,539

Liabilities
Current liabilities
Accounts payable $ 8,290 $ 7,826
Short-term debt $ 2,674 $ 4,645
Accrued liabilities $ 7,032 $ 5,582
Other payments $ 1,661 $ 811
Total Current Liabilities $19,657 $18,864

Long-term Liabilities
 Long-term debt $ 9,858 $ 7,650
Accrued employee benefits $ 9,217 $ 8,595
Other non-current liabilities $ 4,065 $ 3,736
Total Long-term Liabilities $23,140 $19,981
Total Liabilities $42,797 $38,845

Stockholder's Equity
Preferred stock $ $ 2
Common stock (at $1 par) $ 408 $ 364
Additional paid-in capital $ 5,506 $ 5,536
Retained earnings $ 6,280 $ 5,006
Treasury stock ($1,235) ($ 214)
Total Shareholder's Equity $10,959 $10,694

Total Liabilities and Share. Equity $53,756 $49,539

Chrysler Corporation's Income Statement 

for the year ending December 31, (in millions)
This Year Last Year
Sales Revenue $53,195 $52,235
Less: cost of goods sold $41,304 $38,032
Gross profit $11,891 $14,203
Less: operating expenses
Selling & admin. $4,064 $3,933
Pension $ 405 $ 714
Non pension post ret $ 758 $ 834
Depreciation $1,100 $ 994
Amort. of tools $1,120 $ 961
Total operating expenses $ 7,447 $ 7,436
Operating profits $ 4,444 $ 6,767
Less: Interest expenses $ 995 $ 937
Net profit before taxes $ 3,449 $ 5,830
Less: Taxes (40%) $ 1,380 $ 2,332
Net profit after taxes $ 2,069 $ 3,498

Financial ratios
Industry averages Company
This Year Last Year This Year Last Year
Current 1.78 1.69 1.48 1.44
Ratio
Quick 1.55 1.51 1.26 1.26
Ratio
Inventory 7.41 7.58 9.29 11.32
Turnover
Average .021 .021 0.026 0.031
Age of
Inventory
 Average 22.8 23.4 13.56 11.68
Collection
Period
Fixed 1.54 1.62 4.22 4.72
Asset
Turnover
Total .89 .91 0.99 1.05
Asset
Turnover
Debt 75% 77% 80% 78&
Times 6.4 7.0 4.47 7.22
Interest
Earned
Gross 24% 22% 27%
Profit 28% 28%
Margin
Net Profit 4.7% 4.9% 3.9% 6.7%
Margin
Return on 4.6% 4.7% 3.8% 7.1%
Total
Assets
Return on 20.7% 33.8% 18.9% 32.7%
Equity

1. Comment on Chrysler's strengths and weaknesses by ratio category both in terms of time
series analysis and industry analysis. 
2. Should Kerkorian have pursued the purchase of Chrysler?
3. If Kerkorian did not want to takeover Chrysler, what other reasons might he have had for
trying to convince other people that Chrysler was a takeover candidate? 

4. Despite Robert Eaton’s efforts why do you think the Chrysler stock price fails to reflect
the company’s fortunes?
5. Do you think there might exist an agency problem in Chrysler?

Liquidity Average liquidity ratio which is lower than industry. Current assets are low
as compared to the liabilities. current assets have increased from last year
and so have liabilities. Increase in current asset is mainly due to increase in
inventories. Reason for this can be either slow sale or over hoarding of
inventory.2nd factor is increase in accounts receivable. this might be due to
inefficient recovery system. current liabilities have increased due to accrued
liability and other payments.as cash and marketable securities have
decreased from last year it seems firm is having difficulty meeting its
liabilities.
Activity Average age of inventory and average collection period is lower than
industry where as inventory turnover is higher than industry .this means that
company’s collection period is efficient. also inventory is selling at a fast
 speed. this is a good sign. Activity also shows that liquidity problems are
then mainly due to low cash and marketable securities only and not due to
inventory or account receivable.
Debt Debt ratio is higher than industry while time interest earned ratio is lower
than industry.it means that firm is easily meeting its liabilites.
profitability Net profit and gross profit is lower than industry.returns are lower than
industry too.

Based on analysis company was not in any big trouble. nor was it outperforming the industry that
investors should be interested in purchasing it.in my opinion Kerkorian should not have pursued
the buy if the company is not interested.

Kerkorina just wanted the share price of the company to increase as rumors of mergers etc tends
to do exactelt that.he has large number of companys share.may b he wanted to sell them in profit.

Due to remours of fine imposed by by NHTSA

Yes there exist agency problem . instead of giving dividends to share holders company is holding
7bn in cash. Either this amount should have been invested for wealth maximization of should
have been distributed among share holders.