Case 5: Chrysler

Before Chysler merged to become DaimlerChrysler AG, they were presented with a takeover bid of $55 per share by MGM billionaire Kirk Kerkorian 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. 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.

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.

                                          This     Last
                                          year     year
Assets
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                       $     0  $     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

                                          This     Last
                                          year     year
Sales revenue                          $53,195  $52,235
Less: Cost of goods sold               $41,304  $38,032
Gross profits                          $11,891  $14,203
Less: Operating expenses            
 Selling & admin.       $4,064  $3,933
 Pension                $  405  $  714
 Nonpension 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

                                 This     Last
                                 year     year
Liquidity
Net Working Capital             $5,056    $4,892
Current Ratio                    1.78      1.69
Quick Ratio (Acid Test)          1.55      1.51

Activity
Inventory Turnover               7.41      7.58
Average Age of Inventory         .021      .021
Average Collection Period        22.8      23.4
Fixed Asset Turnover             1.54      1.62
Total Asset Turnover              .89       .91

Debt
Debt                              75%        77%
Times Interest Earned             6.4       7.0

Profitability
Gross Profit Margin               24%        28%
Net Profit Margin                4.7%       4.9%
Return on Total Assets           4.6%       4.7% 
Return on Equity                20.7%      33.8% 

Questions

1. Compute Chrysler's financial ratios for the past two years.

2. Compare these ratios to the industry's average. Comment on Chrysler's strengths and weaknesses by ratio category.

3. Should Kerkorian have pursued the purchase of Chrysler?

4. 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?