Monday, June 11, 2007

How dream marriage hit the rocks

The Inside Story: Part 1 of 2

Death of a merger

Bill Vlasic and Christine Tierney / The Detroit News

The message he carried was a harsh one, and Dieter Zetsche had traveled more than 4,000 miles to deliver it in person.  Just days before, on Sept. 15, 2006, DaimlerChrysler AG had stunned the auto industry by forecasting a $1.5 billion third-quarter loss for the Chrysler Group, its second profit warning in two months.

Now Zetsche, the chief executive of DaimlerChrysler, had flown overnight from Germany for an emergency meeting at Chrysler headquarters with Tom LaSorda, the division's CEO, and a half-dozen of his top deputies.

When the door was shut on LaSorda's 15th-floor conference room, Zetsche unloaded.

"This is unacceptable!" Zetsche said, his voice rising. "This cannot continue. There are no more chances."

LaSorda seemed defensive, almost contrite. "We know what we have to do, and we'll do it," he said.

Time was running out for Chrysler. Asked later if LaSorda's job was in jeopardy, one participant said glumly, "We are all in trouble."

But nobody at Chrysler imagined just how much trouble lay ahead.

The turbulent marriage of Daimler-Benz and Chrysler was coming apart at the seams. Frustration in Germany had turned to anger over Chrysler's erratic performance.

Hailed in 1998 as a merger "made in heaven," the transatlantic union of two of the world's biggest auto companies had reached a critical juncture in fall 2006.

After 12 consecutive profitable quarters, Chrysler had imploded.

Inventories of unsold vehicles were choking dealers. Negotiations to cut health care costs for union workers had collapsed. Pressure was building in Germany to dump Chrysler before it capsized the entire corporation.

It was the beginning of the end of the greatest global experiment in automotive history.

Within nine months of Zetsche's meeting in Auburn Hills, Chrysler would be sold for $7.4 billion to private-equity giant Cerberus Capital Management.

And while the deal ushers in a new chapter for an independent Chrysler, the sale marks the failure of a merger that once held unlimited promise.

"It shows the problems of the fusions of big companies," said Willi Diez, head of the Germany-based Auto Industry Institute. "You have cultural differences. You have the problem of who really runs the company."

In interviews with dozens of people close to DaimlerChrysler, The Detroit News has reconstructed key events leading up to the May 14 sale of Chrysler. Most spoke on the condition they remain anonymous.

Summer sales dive

When Zetsche became DaimlerChrysler CEO in early 2006, the affable, mustachioed German executive was hardly thought to be the man who would sell Chrysler.

He had led Chrysler's last comeback as its chief executive from 2001 to 2005 and yearned to solidify the merger by bringing the German and American sides of DaimlerChrysler closer.

Instead, Zetsche would ultimately be disappointed by the inability to find synergies between Chrysler's mass-market cars and light trucks and the luxury vehicles produced by Mercedes-Benz.

Without broad synergies, Chrysler had to succeed on its own under LaSorda, a manufacturing specialist who inherited a truck-heavy lineup of vehicles that sputtered when gas prices soared in spring 2006.

As sales tanked, Chrysler's inventories grew bloated. Heavy incentives in the summer failed to move vehicles off dealer lots. An ill-advised advertising campaign starring Zetsche as the wry Dr. Z fell flat, heightening the tension in Chrysler's executive suite.

In July, Chrysler warned of a $600 million loss in the third quarter. But the second profit warning on Sept. 15 turned concerns about Chrysler into a full-blown crisis.

The disclosure came one week after another painful blow -- the decision by the United Auto Workers to withhold health care concessions to Chrysler that the union had given to General Motors Corp. and Ford Motor Co.

Insiders said Zetsche was furious at the union for rejecting concessions that would have saved Chrysler an estimated $300 million a year. Without the deal, Chrysler couldn't even keep pace with its struggling U.S. rivals.

On Sept. 19, analysts at Deutsche Bank expressed what was on many shareholders' minds in a report headlined "Mercedes potential held back by Chrysler." In interviews at the Paris Auto Show in the fall, Zetsche admitted to harboring "serious questions" about Chrysler's condition.

Feeling the heat

Similar concerns were festering throughout DaimlerChrysler.

In early October, about 300 public relations staffers gathered in Stuttgart, Germany, for the company's annual Global Communications Conference. Presentations by senior executives were mostly upbeat -- until LaSorda's apology-laced speech on the troubles at Chrysler. "This happened on my watch," LaSorda said on a satellite video feed from Auburn Hills. "And we're going to fix it."

As the meeting continued, some Chrysler staffers felt the Germans viewed the U.S. automaker as a drain on the company.

Behind the scenes, Zetsche was ratcheting up the pressure on LaSorda and his team. No one felt the heat more than Joe Eberhardt, a former fast-rising Mercedes exec in charge of Chrysler sales and marketing.

Eberhardt had alienated many Chrysler dealers with his autocratic style during the disastrous summer of 2006. Several dealers called Zetsche to complain about Eberhardt's hard-sell tactics.

"We voiced our complaints every opportunity we had," said Carl Galeana, a mega-dealer with Chrysler franchises in Michigan and Florida. "It was just an ugly, ugly situation."

But Eberhardt had little control over Chrysler's core problem -- the overproduction of mediocre products in a brutally competitive U.S. market. Privately, he told associates that Chrysler relied too much on "one-hit wonders" like the 300C sedan.

When dealers threatened to turn away shipments of unwanted vehicles, LaSorda blamed Eberhardt and asked Zetsche for permission to fire the sales chief. But Zetsche refused.

Instead, he took aim at Eberhardt himself. Insiders said Eberhardt was repeatedly summoned to Stuttgart for grueling sessions with the boss. Afterward, the once-confident Eberhardt emerged from Zetsche's office looking, in the words of one source, "crushed" and "barely able to speak."

But even as Zetsche turned up the heat on Chrysler, he worked feverishly to find ways to fix it.

During his time as Chrysler's CEO, Zetsche bonded with its employees, dealers and suppliers. Moreover, Zetsche and his chief operating officer, Wolfgang Bernhard, had stabilized Chrysler by cutting costs and injecting some sizzle into its vehicles.

Synergies fall short

People close to Zetsche said he truly believed that DaimlerChrysler could become an integrated powerhouse if Mercedes and Chrysler shared more engineering costs and high-volume parts. He pushed hard for more cooperation, and initiated development of common platforms for small-car and SUV models.

The joint projects, however, only underscored the vast differences between a Mercedes and a Chrysler. While engineers could work together, they could not change the reality that a small Mercedes car sells for double the price of a Chrysler compact.

Many Mercedes parts were simply too expensive to include in a Chrysler vehicle. Still, Zetsche pressed on. One German exec recalled challenging the idea that integration could work.

"Thank you for your opinion," Zetsche told him. "I have a different one. We will go on with the cooperation."

Meanwhile in Auburn Hills, LaSorda and his team scrambled to cut costs and save Chrysler's fourth quarter. One program -- dubbed "Project Refocus" -- called for Chrysler to slash at least $1,000 in costs from every vehicle.

Zetsche dispatched top Mercedes executive Rainer Schm├╝ckle to assist in the cost-cutting efforts. Schm├╝ckle and a team from the consulting firm McKinsey & Co. became fixtures at Chrysler headquarters, hunkering down in vacant offices and poring over product plans and budgets.

Yet while DaimlerChrysler struggled to solve its Chrysler problem, the company's shareholders were rapidly losing patience.

Few German shareholders entirely supported the merger. But Chrysler's free-fall in the third quarter had galvanized their opposition. Influential shareholders pressed Zetsche and Bodo Uebber, DaimlerChrysler's chief financial officer, to sell Chrysler.

By late October, the drumbeat to dump Chrysler was growing among investors. Labor representatives on DaimlerChrysler's supervisory board were increasingly concerned that Chrysler's troubles could cost more jobs at Mercedes, which was emerging from its own restructuring.

"Zetsche's pressure comes from so many different constituencies telling him they're sick to death of Chrysler," said John Lawson, a London-based analyst at Citigroup.

And on Oct. 25, the pressure went public.

During a teleconference to discuss the third-quarter results with analysts and reporters, Uebber was asked about the possibility of a Chrysler sale.

"We don't exclude anything here," he said.

DaimlerChrysler's stock shot up nearly 5 percent on the news.

The company hastily issued a statement by chief spokesman Hartmut Schick that there were "no plans" to sell Chrysler. But Uebber's remarks had opened a door that couldn't be closed.

"It wasn't a slip by Bodo Uebber," said Diez, a German auto analyst. "Those remarks were placed to open the discussion."

Inside Mercedes, Uebber's comments were seen as a tactical move. "Now he's said it," said one executive in Stuttgart.

"The next morning, the question was, when's it going to happen?"

Another high-level insider said the stock's rapid gains left no alternative for management but to pursue a sale of Chrysler.

"Without the pressure from the capital markets, there could have been a chance (that Chrysler would stay)," he said.

In interviews, Zetsche steadfastly refused to acknowledge that Chrysler was up for sale. But he was already laying the groundwork for a deal.

Discreet talks

During the Paris Auto Show, Zetsche had discussed the possibility of a Chrysler sale with Carlos Ghosn, head of the Renault-Nissan alliance that was, at the time, in talks with GM about a global partnership.

Zetsche had also begun a deep dialogue with Wolfgang Bernhard, the ex-Chrysler chief operating officer who would soon be leaving a senior post at Volkswagen AG. Bernhard would later be a key player in Cerberus' acquisition of Chrysler.

And by December, Zetsche was testing the waters on a deal of epic proportions -- a sale of Chrysler to GM.

Zetsche met in mid-December with GM Chairman Rick Wagoner, who showed "clear interest" in a deal, said people familiar with the meeting. Wagoner then authorized his CFO, Fritz Henderson, to continue the talks.

At Chrysler, few had any inkling that a sale was in the works.

Eberhardt resigned on Dec. 5, and most executives were preoccupied with crafting a restructuring plan that went beyond the previous Project Refocus. The new plan -- called Project X -- included plant closings and thousands of job cuts that would set the framework for a Chrysler revival.

But while his team worked to revamp Chrysler, Zetsche had secretly informed LaSorda that a sale was a distinct possibility.

Zetsche appeared reconciled that a sale was the best option in early 2007. "It took him awhile to get to this decision, that it was right for Daimler and Chrysler to separate," said a person close to Zetsche. "He came to it with some regrets because he felt close to Chrysler."

Pressure builds

In his exchanges with LaSorda, Zetsche told the Chrysler boss to stay focused on the turnaround. "Keep the blinders on," he said.

Some of the strain was beginning to show on LaSorda, whose job security was the subject of intense speculation.

An executive placement firm, the Atlanta-based Harvard Group, had even sent a letter to Ford asking about interest in hiring LaSorda. When LaSorda heard about it, he told the firm to stop making inquiries immediately because of possible repercussions at DaimlerChrysler.

At the Detroit auto show in early January of this year, LaSorda appeared weary of the white-hot spotlight on Chrysler. "I had enough intensity in 2006," he told reporters at the show. "We're just looking to get profitable again."

In Germany, though, the reckoning for Chrysler was drawing near.

In early February, DaimlerChrysler quietly retained the heavyweight investment bank J.P. Morgan Chase & Co. to examine its options for a Chrysler sale.

At around the same time, GM made a formal bid to buy Chrysler. Essentially, GM offered to give DaimlerChrysler a stake of just less than 10 percent in GM in exchange for Chrysler. GM also proposed a collaborative effort to fund Chrysler's $19 billion health care liability for hourly workers.

The GM offer was rejected as too low, virtually ending the possibility that a sale of Chrysler could be handled in discreet secrecy. If Chrysler were to be sold, Zetsche had to play his cards in public.

The DaimlerChrysler supervisory board was scheduled to meet Feb. 14 in Auburn Hills to approve Chrysler's restructuring plan, followed by a press conference with Zetsche and LaSorda.

Valentine's Day 2007 was supposed to mark a fresh start for the American half of DaimlerChrysler.

Instead, it would be the day that the marriage of two proud automakers would officially be headed for a divorce.

See full image

Coming Tuesday:

How Cerberus outflanked rival bidders to drive off with Chrysler.
July 28, 2005: DaimlerChrysler supervisory board says Chrysler CEO Dieter Zetsche will succeed Juergen Schrempp as CEO of DaimlerChrysler. The next day, Zetsche tells tearful Chrysler employees: "I am, and I always will be, a Chrysler man."
Jan. 1, 2006: Zetsche officially becomes CEO of DaimlerChrysler.
June 30, 2006: With inventory stacking up, Chrysler reintroduces employee discounts for all customers and launches the polarizing Dr. Z image campaign, shown at left.
Sept. 15, 2006: DaimlerChrysler warns Chrysler will lose as much as $1.5 billion in the third quarter. The company had previously estimated a $600 million loss. A few days later, Zetsche was asked if Chrysler would be put up for sale: "I think the answer is a simple no," he says.
Oct. 25, 2006: DaimlerChrysler CFO Bodo Uebber refuses to rule out possible sale of Chrysler. "We don't exclude anything here," Uebber says. DCX later says it has no plans to sell Chrysler.
Dec. 5, 2006: Chrysler sales and marketing executive Joe Eberhardt, at right with CEO Tom LaSorda, resigns under pressure.
Feb. 14, 2007: Zetsche, flanked by top executives, says all options are on the table, including a sale of Chrysler, sending DCX stock soaring.

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