2007-2009: Chrysler Under Cerberus
On May 14, 2007, Cerberus announced that it would buy 80% of Chrysler Group, including the highly profitable Chrysler Financial division. In 2009, Cerberus gave up Chrysler — except for Chrysler Financial. It was an era that started with great hopes, only to have them quickly dashed, ending in bankruptcy, followed by a slow recovery.
The private-equity firm signed on reputable ex-Chrysler people as advisors, including designer Tom Gale, former sales chief Gary Dilts, past Chrysler Financial president Jerry Farrell, and past Chrysler Financial CFO Thomas Gillman. They also hired Mercedes ex-pat Wolfgang Bernhard, who ended up returning to Daimler AG.
Just before the transfer took place (on August 3, 2007), another 13,000 jobs were eliminated.
The plant signs were changed, slowly, starting on August 1, 2007; most often, Cerberus did not pay for the change, and local employees or managers simply covered up the “Daimler.” Labels (including on parts and boxes), brochures, and stationery were updated as they ran out, so that cars and parts had DaimlerChrysler labels until Fiat took over.
On August 4, the new Chrysler web site declared “Get ready for the next hundred years” (the CTC gained a banner with the slogan). Tom LaSorda, Eric Ridenour, and Tom Sidlik left the Daimler Board of Management, and DaimlerChrysler quickly renamed itself Daimler AG. The new company was called Chrysler Holdings LLC and consisted of Chrysler Financial and Chrysler Corporation, LLC.
In an Automotive News interview, Frank Klegon said that Daimler and Chrysler would stil share electrical architectures (with a new, jointly engineered architecture due around 2011) and SUV chassis components. Mr. Klegon seemed happy that Chrysler would have more freedom to work with other automakers and suppliers.
There were three major competitors for Chrysler. Cerberus had political pull, and may have promised continuing joint projects with Mercedes; and they were unlikely to bring Chrysler into competition with Mercedes, or bring the company back, so that Daimler’s line of “we rescued Chrysler” would be proven a lie. The deal also allegedly let Daimler use the Viper design and the next-generation “Pentastar” V6 engines as the basis for Mercedes engines and cars.
Kirk Kerkorian, who had spurred the Daimler takeover in the first place, supported plant workers in Toledo who wanted to take Chrysler over in an employee buyout.
Canadian parts-maker Magna had experience in automotive assembly in Europe. They were working with a private equity firm with a less controversial background.
Other private equity firms in the running, according to Detroit News, were Apollo Management, Blackstone Group, and Carlyle Group.
Initial Reactions and Reality
Employees, dealers, customers, and potential buyers were excited. Allpar saw a favorable response, with many being happy that the Daimler nightmare was nearly over. Reactions were overwhelmingly positive, with autoextremist.com dissenting, as it did when Fiat took over.
Under Daimler, Chrysler had been cut to a third of its size, its cars altered to provide Mercedes with increased purchasing volumes (or royalties), its advertising changed to emphasize “German Engineering” — which cut Chrysler sales but benefited Mercedes (and Volkswagen). Large cars were changed to share more with Mercedes, other cars with Mitsubishi, four cylinder engines with Hyundai and Mitsubishi.
In May 2007, it appeared that Cerberus would run Chrysler to make money, not transfer profits to another division's budget line. That idea died when Robert Nardelli was hired as CEO, replacing Tom LaSorda on August 6, 2007. It seemed that few people within Chrysler were not dismayed, and for good reason: Mr. Nardelli and his team shared a common desire to outsource manufacturing to China.
Well-respected executive Eric Ridenour left just after Bob Nardelli came in; though bringing in Toyota’s Jim Press as co-President and co-Vice Chair helped to counter the gloom.
Cerberus often portrayed itself as patriotically rescuing a great American automaker, but their CEO, multi-billionaire Steve Feinberg, allegedly did not invest his own money, oversaw the outsourcing of manufacturing to China, and then tried to sell Chrysler to numerous Chinese companies.
Cerberus also borrowed $10 billion, using Chrysler assets as collateral, to avoid investing their own money. In February 2008, Steven Feinberg, CEO of Cerbgerus, said, “We do not need to transition the car industry or even to return Chrysler to a much stronger relative position in the U.S. car market in order to be successful.”
Talks with Nissan started in 2007; the companies exchanged term sheets, but Nissan could not get the needed financing. Indeed, Allpar was told that Chrysler executives nearly closed down the Pentastar V6 project in favor of buying Nissan V6 engines.
One source wrote, “Nissan was taking Ram, Volkswagen the vans, one of Chinese companies was taking Jeep. Chrysler, Dodge, and Jeep would be divided up and dumped.” Tom LaSorda wrote in a court statement:
Chrysler sent letters to parties, primarily in China, whom we thought would be potentially interested in purchasing our assets [not say purchasing the company.] ... Beijing Automotive Industry Holding Co., Tempo International Group, Hawtai Automobiles, and Chery Automotive Co., expressed interest in purchasing specific vehicles, powertrains, intellectual property rights, distribution channels and automotive brands.
Mr. LaSorda said that Chrysler also tried to form alliances with Volkswagen, Tata, Magna, GAZ, Hyundai, Honda, and Toyota. The alliance with Toyota suggested by LaSorda and Jim Press would have had Toyota using Chrysler factories to build new products. Toyota quickly rejected the proposal, as did Honda, both preferring to build on farmland in remote areas.
Newspapers wrote that Cerberus also tried to join Chrysler to GM, whose conditions would have involved the loss of nearly all jobs at Chrysler; Tom LaSorda refused to go along with this, according to the reporting.
Around a week after the Cerberus takever, Chrysler announced it will open engineering centers in China, Poland, and India, and would explore expanding relationships with Hyundai and Mitsubishi. Chrysler product chief Frank Klegon said the company would bolster its collaboration.
The same day, the company said it would sell a diesel Ram 1500 in 2009. Dodge was already working with Cummins to package a new V6 diesel engine, and according to an insider, they finished the project but didn’t continue.
By the end of the month, there were reports in the Wall Street Journal that Chrysler was seeking to sell Mopar.
An economic crash in 2008, combined with high fuel prices, slashed demand, and rumors of bankruptcy became self-fulfilling. George W. Bush set up loans to Chrysler and GM to keep them alive until Barack Obama was inaugurated. (Mr. Bush had initially put off a meeting with industry leaders to attend a tee-ball game, and to meet with an American Idol winner and Tom DeLay — who was later booked on conspiracy and money laundering charges.
Bob Nardelli reportedly called Rick Wagoner in January 2009, but GM was not interested. Talks with Fiat, which started in March 2008, had seemed promising; by the time the deal actually came, Cerberus only wanted to hold onto Chrysler Financial, a predictable moneymaker.
President Obama quickly set up a team of people to deal with the problem of GM, Ford, and Chrysler. Ford survived with several billion dollars in low-interest loans from the Department of Energy; GM and Chrysler were put into bankruptcy, shedding billions in debt. Both paid off their high-interest new loans (though not the Bush loans) ahead of schedule, and the government profited well from its post-Bush investments in Chrysler.
The brighter side
In addition to keeping Pentastar V6 engineering on track (albeit after threatening to close it for Nissan engines), and hiring Jim Press to try to increase quality, executives reportedly allowed designers to put another $150 per car into the interiors, helping reduce the excessive cost-cutting of Daimler — though laying off engineers and other employees could not have helped. We can disregard most 2007-2008 model year launches, since these were essentially in the works when Daimler was in charge.
For 2009, the Chrysler Sebring and Dodge Avenger lineups were dramatically simplified, cutting costs, while extras and upgrades (including better sound insulation) were included in both to increase value. 300’s base model was upgraded. Chrysler adjusted the badge placement of many vehicles, for what we believe to be a more sensible and pleasing appearance. Compass and Patriot got a far better interior with more padding, better materials, and more graceful lines and curves.
Dodge Charger and other cars and trucks got the revised Hemi V8 with variable cam timing, good for roughly 370 horsepower and 398 lb-ft of torque; Dodge Charger SRT8 got the Dodge Challenger suspension tuning for a nicer ride, and the Super Bee was brought back.
Dodge Grand Caravan and Chrysler Town & Country got optional blind spot monitoring, rain-sensitive wipers, and rear cross path systems. Gas mileage on the 4-liter models shot up 8% over 2008s while power was boosted. Viper ACR was lightened, with aero works to increase downforce; numerous other improvements were made. For far more, see our 2009 updates page.
Cerberus and its people
Intensely tied to politics, paying their dues by hiring on Dan Quayle, former Treasurer John Snow, and other politicians with dead careers, Cerberus was allegedly in the “pay to play” contracts game; they owned a company accused of mistreating wounded veterans at Walter Reed. A timely $110,000 donation to congressman Jerry Lewis was quickly rewarded with the renewal of a controversial $1 billion contract; US Attorney Carol Lam, who was investigating Lewis’ contributors (presumably including Cerebrus), was fired. Bob Nardelli was a major fundraiser, and some said this may have been the reason he was given Chrysler’s top job despite his record at Home Depot.
Cerebrus did sometimes turn companies around. They also owned 51% of GMAC Financial Services (now Ally Bank) and several large parts suppliers. However, their behavior during Chrysler ownership did not provide any evidence of any regard for American jobs or actual patriotism; they refused to invest in the company after buying it, with personal or company funds, and sought to sell whatever they could, other than the loan company.
And what happened to Chrysler Financial? In late 2010, Cerberus sold it to Toronto Dominion (TD) Bank for $6.3 billion, recovering 90% of their initial investment in Chrysler. As one Allpar contributor wrote,
A private equity firm that buys a company, doesn't want to invest any of its own money after purchase, mortgages it to the hilt, whose owner openly states they do not have to return Chrysler to a much stronger position when it is losing billions a year, and exits while keeping the only profitable part of the company while dumping the rest, was never in it for the long haul. If they were in it for the long haul, they would have taken Chrysler through a traditional bankruptcy themselves.
Cerberus certainly had the cash to take Chrysler through bankruptcy and into the future, and most likely would have made a large profit doing so — assuming they had removed Mr. Nardelli and his ex-Home Depot crew first.
Cerberus came in as knights in shining armor, but their behavior tended to be more like stereotypical used-car salesmen. Under their rule, Chrysler had some notable successes and invested in making their product line better, but always with an eye towards selling the company, preferably to a Chinese company, but to anyone who would pay. The Cerberus goal seems to have always been Chrysler Financial, not the car-making group; and any thought that they were in for the long haul, should have been dispelled by the first engineer layoffs and by the hiring of Bob Nardelli. It is also telling that multi-billionaire Steven Feinberg, head of Cerberus, reportedly refused to invest his own money once he had Chrysler Financial.
The time and energy spent on selling the company, rather than fixing it, was also a “tell.” When Fiat took over, Chrysler was doing even worse, and the economy was equally bad, but they still turned it around fairly quickly.
The success of the company under Fiat, before Fiat designs were used to launch new vehicles, shows that Chrysler could have recovered given investment, leadership, and favorable publicity. Cerberus did make some investments — they started much of what Fiat was able to take credit for, including numerous refreshes — but reportedly, Sergio Marchionne ordered further investment in vehicles from the start. The results were positive, with overall sales rising, retail sales booming, and incentives falling.
One can speculate endlessly about the past, but it seems most likely that, had one of the other buyers been put in charge, Chrysler may have been rescued without government help — even by the same mechanism Ford used, that is, a private line of credit (advised by Chrysler’s own economists) before the crisis.
Likewise, without the Daimler merger, Chrysler would never have been weak enough for Cerberus to pretend to be its saviors in the first place.