Saving Chrysler... Maybe

[CSpec]

Saving Chrysler. Maybe.
Cerberus is not out to bail out the automaker for the good of America. What the firm—and the union—really want.

(Taken from Newsweek)

May 14, 2007 - Detroit was stunned Monday morning to wake up to the news that Chrysler had been sold to Cerberus Capital Management, a Wall Street private equity firm named for the three-headed dog that guards the gates of Hell. The unsettling news grew even more ominous when one of the Detroit TV stations began broadcasting the news conference live from Germany with a stern-sounding German translator drowning out the English being spoken by DaimlerChrysler Chairman Dieter Zetsche. It all reminded me of that R.E.M. song “Welcome to the Occupation.”

But then the charm offensive began. Sitting between Zetsche and Chrysler CEO Tom LaSorda on the dais in Stuttgart was the avuncular John Snow, the former Treasury secretary who is now chairman of Cerberus, a $23.5 billion private equity investment firm that owns such household names as Fila and Formica. (More importantly, it has amassed several auto holdings, including a controlling stake in GMAC, the financing arm of General Motors) Far from appearing like a Wall Street sharpie eager to carve up Chrysler, Snow spoke in soothing tones about continuity. “There will be a continuing relationship between Daimler and Chrysler,” he said, looking fondly over at LaSorda. “That’s a vote of confidence, Tom, in you and in us.” And now that Cerberus is taking Chrysler private in a $7.4 billion transaction, Snow assured his new friend Tom that he would no longer have to operate in the pressure cooker created by having pesky public shareholders. “We can let ‘em focus on running this great company,” Snow said of the automaker that lost $1.5 billion last year, leading Daimler to unload Chrysler after nearly 10 years of unhappy marriage. (Daimler will retain a 19.9 percent stake). Best of all, though, Snow was “absolutely delighted” to have the backing of United Auto Workers President Ron Gettelfinger. “Having the support of Ron Gettelfinger tells us a lot,” he said. “We respect the role of organized labor.”

At that point, this deal was being coated with so much sugar it was making my teeth hurt. So I thought I would strip away the sweetness and shed a little light.

For starters, this is no bailout like Chrysler received from Congress a generation ago. Back then, Chrysler was an American icon that President Jimmy Carter saw as an engine of the U.S. economy. While Chrysler will once again become an American company in this deal, the U.S. economy is no longer defined by Detroit. If it were, we wouldn’t have a 13,000 Dow and low unemployment while Detroit’s three automakers hemorrhaged more than $16 billion in red ink last year. Cerberus is not out to save Chrysler for the good of America. Rather, Cerberus’ goals are succinctly explained by University of Michigan business professor Gerald Meyers, who was at the wheel of American Motors when it sold out to Chrysler back in 1987. “Cerberus' game is all about build it up, sell it and get out,” says Meyers.

And how might Cerberus make Chrysler look profitable? It will make it shrink to fit its diminished place in the American automotive market. Since rising gas prices flattened the tires of the SUV business, Chrysler really has only had a couple of strong model lines left—its minivans and the Jeep brand, which has the classic American appeal of Harley Davidson. Chrysler still sells a lot of Dodge Ram pickups, but the roof is falling in on that market along with the housing industry. LaSorda has already announced plans to cut 13,000 workers and close factories. And Chrysler officials insisted Monday there would be no more layoffs. But analysts predict Cerberus will want more. Why? Because Chrysler’s current cuts are aimed at holding on to 13 percent of the U.S. car market, when it actually may only be able to profitably control 10 percent, says Meyers.

Cerberus’ seemingly cozy decision to keep LaSorda in charge will not be without limits, either. Watching over him will be Wolfgang Bernhard, Chrysler’s former No. 2 exec who is now an adviser to Cerberus and will likely get a board seat in the new Chrysler Holding LLC. “Let’s face it, LaSorda may be nominally in charge, but there’s a new owner in town,” says veteran auto analyst Maryann Keller. “Cerberus’ man on the line here is Wolfgang Bernhard.”

Perhaps the biggest fallacy among all the public platitudes Monday is the notion that LaSorda will have more breathing room by not being part of a public company. “That’s baloney,” says Keller, author of several books on Detroit and adviser in many Wall Street auto deals. “The problems at Chrysler have nothing to do with public ownership and the scrutiny of investors in New York. American investors were bit players in Daimler stock.” The real pressure will come with private ownership, which is far more focused than millions of public owners scattered around the world. “The idea this is going to make things easier at Chrysler is crazy,” says Keller. “This makes things tougher because as soon as something goes wrong you’ll have Wolfgang Bernhard in your office. That’s direct, in-your-face pressure.”

The most mystifying turn of events, though, is the UAW’s apparent acquiescence in this deal. A month ago, Gettelfinger said he had “grave concerns” about the private equity players circling Chrysler, which included Cerberus and the high-flying dealmaker the Blackstone Group. He saw them as carving up Chrysler and selling off pieces to the highest bidder, while destroying jobs and communities. “I call ‘em strip and flip,” he said then.

So why would Gettelfinger do his own apparent flip? Well, his support is extremely guarded. In a press conference Monday, Gettelfinger grew edgy as he tried to explain why he lost his bid to keep Chrysler a part of Daimler. “I’m going to go through this one last time,” he said. “The status quo was off the table. The decision to go with Cerberus was already made before we got there” in Germany Saturday to meet with Zetsche and LaSorda. After the execs laid out their rationale in a four-hour meeting, the union boss huddled with his advisers and decided to back it as the best alternative to staying with Daimler (which never warmed to Chrysler’s down-market cars and trucks or truly adopted its American cousins). “The point is, you’re dealt a hand,” says Gettelfinger. “And you play with the hand you're dealt.”

But Gettelfinger’s play could be calculated. When Chrysler enters contract talks with the union this summer, Gettelfinger holds a big trump card with the $18 billion in health and pension costs Cerberus agreed to take off Daimler’s hands. Cerberus would dearly love to cut those crushing costs, which help explain why all American auto makers have a hard time making a buck. The best way to pare down those costs is to get concessions from the union. But the union will want something big in return, like job guarantees or other goodies. After all, Cerberus has very deep pockets. Why should the union turn a cold shoulder to the new owners before they’ve heard what they have to offer? Gettelfinger seemed to acknowledge that was how he was playing his hand. “We believe we’ll get a lot of mileage out of where we’re at with our position,” he said.

How many miles Cerberus will ride with Chrysler is uncertain. Some analysts believe Cerberus will hold onto Chrysler for the length of one union contract—four years. Then it will likely put a smaller, more profitable player back in the public domain through an initial public offering of stock. “Cerberus wants to show a company coming back with the potential to be extremely profitable,” says Meyers. “Then here come the investment bankers to do an IPO. And everybody at Cerberus becomes a billionaire.” But before Chrysler, and Cerberus, arrive at that happy destination, they’ll have to drive through the union first. They’d better fasten their seat belts.

[FUTURE_OF_GM]

Because Chrysler’s current cuts are aimed at holding on to 13 percent of the U.S. car market, when it actually may only be able to profitably control 10 percent, says Meyers.

I just love how all the 'analysts' always want to milk 3 points of share off the total.... And what happens when this company downsizes to 10%? The analysts will ask that they downsize to 7 or 8%....

So, that puts Chrysler at 10%.... GM at 20% now and Ford ultimately controlling 13% for a combined share of: 43%, by analyst projections. Welcome to the new import dominated market!

The most mystifying turn of events, though, is the UAW’s apparent acquiescence in this deal. A month ago, Gettelfinger said he had “grave concerns” about the private equity players circling Chrysler, which included Cerberus and the high-flying dealmaker the Blackstone Group. He saw them as carving up Chrysler and selling off pieces to the highest bidder, while destroying jobs and communities. “I call ‘em strip and flip,” he said then.

Because just like everyone else, he knows that the UAW reign of terror is drawing to a close.

[Newbiewar]

so they are saying... this firm will control it for a few years build its value back up... then sell it again...

if its 7.4 billion now...

i would assume it would be at least worth 20 billion before they let it go again...

who is going to be willing to spend that?

[ponchoman49]

Quote:So, that puts Chrysler at 10%.... GM at 20% now and Ford ultimately controlling 13% for a combined share of: 43%, by analyst projections. Welcome to the new import dominated market!

It's amazing what a piece of $h! this decade has turned out to be. Everyday turns out to be worse than the last, bad news after bad news, a sea of bland boring generic Asian clone cars coming online and our wonderful global world that puts Americans out of work and on the streets. Is there ever any good news these days?

[Windy-57]

A couple of thoughts...

I do believe that being privately held will be a huge advantage and will give Chrysler the time and freedom to do what is truly right. I think the most amazing part of GM's progression in their turnaround has been how they have deflected the scrutiny of Wall Street while doing what is truly right for the long-term.

Yeah, the whole "we'll play nice" stuff is typical and a bunch of BS. If you believe that with Wolfgang essentially running the show that they will play nice then you might as well believe that the Pope will convert to Buddhism. Don't get me wrong, I like Wolfgang and think his "bull in a china shop" mentality is much needed in the industry, but it's not going to be pretty or nice along the way.

And yes, Cerberus has plenty of money in their pockets, but don't think for a moment that they would buy Chrysler in order to share any of it with the UAW. Mark my words, the upcoming negotiations between Chrysler and the UAW will be ugly. I believe that Cerberus would rather use their deep pockets to withstand a strike and bust the union as opposed to using it to meet union demands.

[FUTURE_OF_GM]

And yes, Cerberus has plenty of money in their pockets, but don't think for a moment that they would buy Chrysler in order to share any of it with the UAW. Mark my words, the upcoming negotiations between Chrysler and the UAW will be ugly. I believe that Cerberus would rather use their deep pockets to withstand a strike and bust the union as opposed to using it to meet union demands.

Which means Cerberus might be the catalyst that ALL of the big 3 needed to finally bust the union for good.

Think about it... Cerberus has plenty of money and they can see how COMPETITIVE a UAW-free Chrysler would emerge as.

But then again, I seem to think that's the attitude of ALL the Detroit automakers currently. They're fed up and they know that they've hit bottom, for the most part. Share is close to bottoming out, the government is about to crash the truck party and they ALL face bankruptcy or serious fiancial hardship if the UAW is not capped or dealt with in some way. So, the question is; how far are they willing to push things? It's probably certain death if the UAW refuses to move, so why not shut the ride down a few years early by playing hardball?

The difference with Chrysler is; they're in the best position now when the dust settles, with the deep pockets of Cerberus and their determination to turn the business around.

Edited May 17, 2007 by FUTURE_OF_GM

[VenSeattle]

so they are saying... this firm will control it for a few years build its value back up... then sell it again...

if its 7.4 billion now...

i would assume it would be at least worth 20 billion before they let it go again...

who is going to be willing to spend that?

They could break-up the Unions and sell Chrysler in pieces.

Of course, that's a worst-case scenario

[Windy-57]

The auto extremist has a good little writeup on this...check it out if you have a chance.

Basically, he believes that Cerberus will give Chrysler a chance if the UAW moves and if not they'll tear it to pieces.

[Oracle of Delphi]

Well if they do break it up and sell it off, I hope GM buys Jeep and merges it with Hummer!

[CaddyXLR-V]

I'm starting to think GM might have had something to do with this. GM knows if Cerberus breaks up the union, that benefits GM as well, or, if they sell Chrysler in pieces, that also benefits GM. GM does have ties with Cerberus, since they are co-owner of GMAC. Maybe the speculation of GM buying Chrysler was really just GM pulling the strings behind this deal.

[Intrepidation]

So once more you guys are gonna start chanting for the breakup of Chrysler? Seriously.

Hopefully Cerberus can move through the UAW but just as importantly get Chrysler's products back on track.