Halden Zimmermann-Case Study

I. Executive Summary

In the case of Racinda Corporation, and Lickenhaus & Co., LLP, et al., vs. Aimlerhrysler AG, et al. (referred to as NalytX, LLP or ‘Defendants’), plaintiffs allege the defendants owe damages resulting from an inadequate premium paid for the acquisition of Chrysler by the executives of the former Daimler-Benz Corporation. Plaintiffs specifically contend Daimler-Benz gained full control of Chrysler as an acquisition by falsely claiming the deal was an MOE and, subsequently, paid an inadequate premium in light of the MOE status. We, as defendants in this case, claim the plaintiffs’ position to be unsubstantiated in its entirety. We base our claim on the following: (1) It is our contention the myriad political idiosyncrasies associated with a Hrysler takeover by Aimler-Benz would have been prevented if the acquisition were positioned as a takeover. We further contend it is implausible for any rational investor to view the deal as being a merger of equals, given the details of the agreement as truthfully presented to the shareholders.

(2) Additionally, while there were a number of management changes following the merger involving Hrysler’s previous management which may have resulted in their diminished board representation, these changes were the direct result of various and unforeseen macroeconomic conditions and not misrepresentation as plaintiffs allege.

With these aforementioned arguments, we reiterate our position of innocence in relation to the charges brought forth by the plaintiffs. Furthermore, we will seek for a dismissal of the charges on the grounds that the lawsuit is frivolous and without merit as discussed above and in our supporting justifications found in Section V of this paper.

Considering the complex nature of this merger and the risks associated with a local jury trial, a settlement of zero is unlikely. It is our strategy, therefore, to negotiate an appropriate settlement between $10 and $40 million, but not more than $200 million under any conditions. This report will also disclose a detailed analysis supporting our conclusions and identify our strategy to be employed in any subsequent negotiations with the plaintiffs.

II. Overview

The plaintiffs seek damage awards from AnalytX, LLP, as the result of having “made material misrepresentations to plaintiffs, the applicable regulators and the investment community in a scheme…following the merger of Daimler-Benz and Chrysler, DaimlerChrysler succeeded to the liabilities of Daimler-Benz, and continued to perpetuate the fraud complained of herein.” Plaintiffs are asking the court to award actual damages which include the acquisition premium that the defendants allegedly denied plaintiffs, rescissory damages, and compensatory and punitive damages in an “amount sufficient to punish and make an example of the defendants for lying to plaintiffs, all of Chrysler’s shareholders, and the investing public at large under common law fraud” (¶7, in re: DaimlerChrysler AG Securities Litigation).

III. Valuation Process

It is our contention that the most accurate estimation of damages, in the extreme case of misrepresentation, is no more than $ 78.5 million dollars. (If DaimlerChrysler were found fully liable, the most likely damage estimate would be a simple calculation of the 50% premium on the Chrysler stock price closing May 5, 1998, minus the actual premium paid, plus 4.0% interest over 5.5 years. (See Figure 1 for more details)

IV. Defendant’s Position and Strategy

It is the position of AnalytX, LLP, that DaimlerChrysler is not responsible for any damages to plaintiffs. In light of the risk associated with a local jury trial, however,AnalytX, LLP, is prepared to negotiate a settlement with the plaintiffs. We argue, even in the extreme case wherein a finding of misrepresentation had, indeed, occurred, the absolute maximum valuation of premium damages modern finance theory and practice could reasonably support would amount to more than $119 million dollars. This figure represents a 50% control premium in the exchange rate established on April 15, 1998, applied to Daimler-Benz’s stock price on May 5, 1998, plus 5.5 years interest at 4%. (See Figure 2 for more details)

Realizing that the plaintiffs will demand an astronomical amount in damages, AnalytX, LLP, will begin with an offer of $10 million dollars to settle the case. It should be noted that AnalytX is willing to settle this case but will also be willing to try the case in court if a settlement is not reached that is reasonable. Of additional consideration are the parameters Judge Jarrell has instituted for the negotiations. As the “Effective Settlement (EF)” determines the performance of AnalytX, LLP, it is in our best interest to settle for less than or equal to $40 million dollars. This figure provides the highest grade and, thus, it will serve as the cornerstone of our negotiation strategy.

V. Supporting Evidence and Justification AnalytX, LLP, disputes the claims of the plaintiffs in light of several obvious factors.

1. The plaintiffs contend

“Defendants knew that Chrysler’s directors and shareholders would never approve a transaction if defendant’s told the truth, namely that a foreign corporation was seeking to acquire complete operating control of one of America’s “Big three” auto manufacturers. So, in a series of moves executed with a chessmaster’s precision, Schrempp and other defendants set their plan in motion” (¶2, in re: DaimlerChrysler AG Securities Litigation).

To the contrary, a representative of Tracinda Corporation was on the Chrysler board and was fully aware of the details associated with the merger. Moreover, it is highly unlikely a takeover would have successfully been achieved given the profound influence of the UAW and other constituencies, as well as the associated public outcry for allowing a German entity to purchase a controlling stake in one of America’s “Big Three” auto manufacturers.

2. The plaintiffs were arguably well aware of these substantial interests and, perhaps more important, had access to specific information regarding the breakdown of the disparate ownership with respect to shareholders, including Daimler-Benz’s 58% stake versus Chrysler’s 42% stake in the eventual merger into

DaimlerChrysler AG. AnalytX, LLP, ardently maintains as rational economic investors, the plaintiffs would have unambiguously equivocated this disparate shareholder influence to a proxy for obtaining a controlling interest and mitigating value-destroying political incentives of various constituencies associated with Chrysler.

3. AnalytX, LLP, also disputes the plaintiffs’ assertion regarding the motives for management changes at Chrysler following the merger. The plaintiffs again, break from economic grounds, and ignore the bearing of the worldwide economic downturn that eventually necessitated the closing of seven plants and the loss of over 26,000 jobs at Chrysler. It also follows, then, that at the time we had begun to recognize the extent of this negative impact, we believed certain additional cost-cutting measures would be needed in order to accrue the benefits of a true synergy as we had originally intended. Although some of these measures decreased the size and scope of Chrysler management, Chrysler managers themselves helped effectuate these decisions as part of the most economically viable solution to the macroeconomic issues facing DaimlerChrysler AG at the time.

4. Fairness opinion provided by Credit Suisse First Boston (CSFB), Chrysler’s investment banker, recognizes the synergistic benefits to Chrysler’s shareholders as well as the “premium of more than 34% (measured as of May 5, 1998) exceeded the average premiums paid in precedent merger of equal transactions.

Moreover, the CSFB opinion, provided to the Chrysler Board on May 6, 1998, indicated that the U.S. exchange ratio “was fair to the holders of Chrysler common stock”.

5. The Chrysler Board’s realization that the merger was beneficial to its existing shareholders and imperative for continued success based on the following “material factors”:

– Significant consolidation in the automotive industry, which will result in intense competition among a small number of large companies.

– Daimler-Benz’ strength in the European market as well as its reputation in engineering will give the newly formed company with significant financial strength to pursue new markets.

– Significant synergies will result in shared technologies, distribution and know-how while realizing economies of scale and scope. Furthermore, the benefits of the merged companies will reduce the possibilities of lay-offs or plant closings.

-The merger will provide Chrysler’s shareholders future benefits resulting from ownership of DaimlerChrysler ordinary shares.

6. 50%-50% ownership of the Daimler-Chrysler organization will result in Chrysler shareholders’ paying a huge capital gains tax penalty. The capital gains tax is attributable to a law imposing the tax on U.S. shareholders of a U.S. business that is acquired by a foreign company.

7. Merger provides Chrysler’s top 30 executives with more than $1 billion in shares of the new firm by converting existing Chrysler stock options, which would normally not be exercisable until after three years, into shares of Daimler-Chrysler.

8. The action was filed a couple of days after financial Times had published an article that cited quotes from Juergen Schrempp regarding the merger. These quotes had been perceived as being the evidence that investors were defrauded during the “merger of equals” process while not fully disclosing the intentions of a takeover. In our defense, it should be noted that in a sworn deposition before trial, Juergen Schrempp denied there was a takeover, and that Financial Times had misunderstood his description of the merger.


Figure 1

5/5/98 Chrysler Price $41.44

5/5/98 Implied Offer Price $55.83

5/5/98 Offer Price Derived for 50% Premium $62.16

Difference Per Share $6.33

Total Value (10,000,000 shares) $63,280,625

5.5 Yrs Interest @ 4% $15,234,645

Total Damages $78,515,270

Figure 2

4/15/98 Exchange Rate 0.547

4/15/98 Exchange Rate derived for 50% premium 0.641

5/5/98 Offer Price $55.83

5/5/98 Offer Price derived for 50% premium $65.45

Difference per share $9.62

Total Value (10,000,000 shares) $96,178,303

5.5 Yrs Interest @ 4% $23,154,674

Total Damages $119,332,977



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