Case 2 – The Chrysler Takeover Attempt
1. Evaluate Chrysler’s financial and operating performance between 1980 and 1992. What financial and investment policies did they pursue and why? How successful were they? During the early 1980s Chrysler recovered from a severe enterprise crisis in 1978. Vehicle sales grew stable from 1980 to 1986 (with a small stagnation in 1982). In 1983 they grew much stronger than the U.S.-vehicle market and their competitors. This reflected in a steady earnings growth and Chrysler was able to repay a granted government loan 7 years earlier than initially scheduled. In 1987 their vehicle sales declined, due to a lack of investments in new product lines, Chrysler had no major new car developments in the pipeline in the late 80’s, which led to a consistent decrease in sales until 1991. In the meantime, Chrysler followed a diversification strategy (starting around 1983) and acquired different companies from other industries and established some joint ventures. 1990 to 1991 was also the time of an economic recession. In order to face the company’s sales decline and the economic downturn they undertook several measures. They ended their diversification strategy and generated cash by selling off non-automotive business units. Cash came also from stock offerings and a debt offering. However, the company was in a miserable position, junk rated and facing an underfunded pension plan. In 1994 the company had reached a solid foundation, outperforming their competitors with an operating profit per vehicle of $1990. All in all, the time frame can be described as a rollercoaster ride with a solid ending position. 2. What should Chrysler’s capital structure look like? What payout policies should they pursue? How does that compare with the policies pursued by current management? It is hard to tell how the ideal capital structure of a company should look like. Looking at the main US-competitors of Chrysler however reveals that they hold less cash...
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