May 15, 2007
Chrysler, Jeep and Dodge vehicles are ready for transport Monday at the Jefferson North assembly plant in Detroit. Chrysler and Cerberus say no further job cuts are planned, but workers aren't so sure.
After revealing a landmark sale of a major U.S. automaker to a private equity firm, executives with DaimlerChrysler AG and buyer Cerberus Capital Management sought Monday to reassure workers and the public that the Chrysler of the future would be stronger and more stable.
Cerberus plans no job cuts beyond those announced in a February reorganization, said Chrysler CEO Tom LaSorda, who was praised by the buyer and is expected to remain in charge of the Auburn Hills-based maker of Dodge Ram pickups and Chrysler 300 sedans.The companies also pledged a constructive relationship with the UAW as the union and U.S. automakers head into national labor talks this summer.
Cerberus Chairman John W. Snow said Chrysler, as a privately held company, could thrive without the demands placed on public companies for short-term performance.
"Our capital is patience," he said. "We take a longer view. We are prepared to make investments that support management plans."
Despite the assurances of stability, workers and auto-industry observers expect Cerberus to follow a pattern more like its track record suggests: Swift action, when necessary, to cut jobs, replace executives, jettison money-losing units, even relocate headquarters -- whatever is required to earn an estimated 22% on its investments.
The deal drew a blessing from UAW President Ron Gettelfinger, despite his history of criticizing private equity firms' forays into the auto industry.
"The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler," Gettelfinger said.
Snow insisted that Cerberus has faith in the strength of U.S. manufacturing and the U.S. auto industry.
"Most importantly," he said, "we believe in Chrysler."
A troubled marriage
If the deal is completed in the third quarter, as the companies predict, a major Detroit automaker will be owned by a private company for the first time in generations.
The deal will mark the end of a nine-year union between Daimler-Benz AG and Chrysler Corp. that at the time was billed as a merger of equals and seen as the template for global businesses.
The marriage between Daimler and Chrysler, which cost about $36 billion in 1998, was marked with strife between the units and repeated calls by German shareholders for divorce. In the end, DaimlerChrysler Chief Executive Dieter Zetsche said, all possible synergies between Chrysler and Mercedes had been fully utilized.
"We're confident that we've found the solution that will create the greatest overall value -- both for Daimler and Chrysler," Zetsche said.
Enter Cerberus, which beat out two other serious groups of competitors -- Canadian auto supplier Magna International Inc. and its investment partner Onex Corp. and private equity firms Blackstone Group and Centerbridge -- to emerge at 4:31 a.m. Monday as the top bidder, paying $7.4 billion to acquire an 80.1% stake in Chrysler.
"This is a great day for Detroit," Snow, former U.S. treasury secretary, said on WJR-AM (760). "The great name of Chrysler is coming home."
Workers, meanwhile, worried Monday about job cuts and plant closings, as they have since Feb. 14, when Zetsche said all options were on the table for Chrysler.
"I have concerns about being fired by a private equity firm," said Alex Wassell, who works in Chrysler's Warren stamping plant. "I'm not quite won over by Cerberus."
Canadian Auto Workers union President Buzz Hargrove has voiced strong opposition to a private equity firm taking Chrysler and expressed frustration that he was not told of the deal until 4:30 a.m. Monday. "We are not thrilled at all," Hargrove said.
Snow said his company respects the role of organized labor. "As the company succeeds, it will optimize the opportunities for the workers," he said. "Our objective here is a successful Chrysler."
Gettelfinger said he was given assurances, which he declined to enumerate, that he hopes to get reaffirmed today in a meeting with Chrysler and Cerberus officials.
Zetsche said the deal is not contingent on any negotiations with the unions.
The new Chrysler will take pension and health care liabilities, which have been estimated to be worth nearly $20 billion. DaimlerChrysler said its pension is overfunded.
In 2006, Chrysler posted an operating loss of $1.5 billion, a number recently restated to $680 million because of accounting changes.
The newest piece
Former Chrysler Chief Operating Officer Wolfgang Bernhard's role as an adviser to Cerberus is believed to have helped Cerberus seal the deal. Bernhard, who helped orchestrate the previous turnaround plan at Chrysler, has been seen around headquarters in Auburn Hills and seemed a favorite among some Chrysler executives.
Snow said, however, that Bernhard will not be on Chrysler's management board. He added that Bernhard is a "close friend" of LaSorda. "He and Mr. LaSorda will work well going forward," Snow said.
For Cerberus, the acquisition of Chrysler, which still requires regulatory approval as well as a final vote by DaimlerChrysler's supervisory board, expected Wednesday, adds a large new asset to a growing auto-industry portfolio.
Just last year, Cerberus finalized a deal to acquire 51% of GMAC, General Motors Corp.'s financing arm, and analysts speculated Monday that Chrysler's financial arm could fit well into new partnerships there.
It's been estimated that half of the $2.3 billion that DaimlerChrysler Financial Services made last year in operating profits came from leases and loans on Chrysler vehicles.
"I would expect to see a combination of Chrysler Financial and GMAC within 18 to 24 months after the transaction closes, to form a formidable auto financing firm," said Brian Krasicky, an expert in corporate finance from O'Keefe & Associates.
But those types of issues were not addressed Monday. Instead Cerberus, Chrysler and DaimlerChrysler officials focused on the new Chrysler Holding LLC, which was agreed to in Stuttgart, Germany, early Monday.
"Sometimes, companies can do better outside the requirements of quarterly analyst reports and outside the continuous attention to short-term results. We think Chrysler is that situation," Snow said.
Snow praised LaSorda's turnaround plan, which is under way to return the company to profitability. The plan, announced in February, includes cutting 13,000 jobs over three years.
Many experts have predicted that any private equity firm that purchases Chrysler will likely cut more jobs.
But LaSorda worked Monday to eliminate such concerns. "There are no new job cuts planned in connection with this transaction announced today," he said in a statement.
LaSorda said Chrysler as a private company "will be better positioned to focus on its long-term plan for recovery."
"Cerberus is the right strategic buyer for Chrysler, with a long-term commitment to Chrysler's growth and success," LaSorda said. "They are committed to working constructively with both union leadership and Chrysler's management team to help Chrysler realize its full potential."
David Cole, chairman of the Center for Automotive Research, has routinely said he does not believe Chrysler can survive on its own as a viable automaker and predicts changes, noting another automaker might be waiting in the wings to purchase Chrysler after it has been cleaned up.
"They average something like a 22% return on their investments. That means they are not a society for benevolence of workers," he said. "Private equity is needed in this industry. It brings tough discipline."
Mergers and acquisitions expert Van Conway, senior managing director of Conway, MacKenzie & Dunleavy, sees the new owner as a good thing. "They are going to throw money at this thing to fix it. They may demand more concessions, but so what? If you have a long-term view of Chrysler, I think it is a positive," he said.
It's not a total divorce for Daimler and Chrysler. The future Daimler AG will retain a near 20% stake in Chrysler, handling its international operations and other efforts coordinated through a joint council.
Zetsche said in a letter to Chrysler employees:
"Endorsing this decision is the toughest thing I've done in my professional career. Like so many of you, I have made a personal investment in and commitment to both Chrysler and Daimler. And this is exactly the reason that we explored all options to find the best solution for Chrysler's long-term future."
No hurdles seen
The Cerberus file: Many auto holdings
About John W. Snow