Cerberus Buys Chrysler: The Ongoing Story
The Cerberus - Chrysler story
On May 14, 2007, Cerberus announced that it would take ownership of about 80% of Chrysler Group, including Chrysler Financial; the deal is expected to be finalized by September 2007. Cerberus had already signed on numerous ex-Chrysler people as advisors, including Tom Gale, the designer who oversaw the original LH, PT Cruiser, Ram, and Viper; Gary Dilts, the former sales chief, who is currently at J.D. Power; Jerry Farrell, former president of Chrysler Financial; Thomas Gillman, former CFO of Chrysler Financial; and Wolfgang Bernhard, who was imported from Mercedes (but who apparently will not be involved at Chrysler now). Dieter Zetsche said that the main reason for choosing Cerberus was Chrysler’s long-term success, but it’s also possible they gave the most concessions with regard to continuing joint projects with Mercedes.
The plant signs are being changed, slowly, as these cost thousands of dollars. Labelling throughout the cars and boxes and brochures could take quite a while to switch back from DaimlerChrysler. Business cards and letterhead might be updated as it is replenished.
An Automotive News interview with Frank Klegon noted that the two companies would continue to share electrical architectures (with a new, jointly engineered architecture due around 2011 or 2012), SUV chassis components, and other technologies. A joint operating board will be set up to oversee joint projects; it will have three members from each company. The approach, according to Klegon, will be more specific rather than “a big blanket of things.” Mercedes will continue to supply Bluetec diesel technology, active safety systems (e.g. stability control), and fuel cells. Chrysler will, however, be able to work with other automakers and suppliers, and Klegon seemed to be very happy about that.
While Klegon said the companies would not share chassis, a jointly engineered platform - the new Mercedes B Class and un-named Dodge or Chrysler vehicles - is almost certain to be introduced, with vehicles made in China.
Cerberus paid $7.4 billion, $5 billion of which goes to Chrysler Corporation LLC and $1.05 billion to Chrysler Financial Services; Daimler gets the remaining $1.35 billion, but loans back $400 million of it. Daimler retains all debt from Chrysler Group, costing Daimler a net $650 million plus prepayment compensation of $878 million and transaction costs. Chrysler’s pension fund is currently overfunded by about $2 billion but the health care costs are a major issue. Closing of the deal is expected by July 14.
The five key reasons for choosing Cerberus were "a sustainable, successful future for Chrysler; minimal risks and liabilities for Daimler in the future; the certainty of the transaction; speed; and the value of the transaction." Other reasons suggested by Allpar readers include being able to keep a chunk to continue to profit from Chrysler; realization that Mercedes would never integrate money-saving Chrysler technologies, outside of certain assembly processes adopted early on; that Mercedes was unwilling to share any current technology, and that Mercedes-priced components and architectures made cars below the $30,000 level uneconomical; needing the cash; wanting to be free from the health-care liabilities; and realizing that Daimler was completely unable to run Chrysler, any more than BMW was able to run Rover. Chrysler owes Dieter Zetsche a debt of gratitude. It would have been easy for him to keep downsizing until there was nothing left, to try to break the UAW in a massive showdown, to sell off assets piecemeal and let the company declare bankruptcy, or to spin it off as a separately traded corporation with no capital.
Several people have noted that Tom LaSorda seems very excited by the sale; not only that, but according to sevearl accounts from different people, employees, dealers, and potential buyers are also excited. The CAW's Buzz Hargrove said that Chrysler was set to grow again, though it'll shrink first. Ken Lewenza, CAW negotiator, quoted Stephen Feinberg as saying, "Chrysler is not just another manufacturing company, it's an icon, and we want to grow the business."
Allpar has experienced an unusually favorable response to the buyout - with many breathing a sigh of relief that the Daimler nightmare is nearly over. Reactions have been overwhelmingly positive on other forums, with the most notable dissenter being autoextremist.com. It is surely reasonable to maintain some doubts, but overall, the situation is better than it has been since 1998. A number of people suddenly became less optimistic when Cerberus appointed the first Chrysler LLC CEO.
Unfortunately, that positive reaction died out nearly completely, with the euphoria turning into a cautious “when will the other shoe drop?” when Robert Nardelli was hired on as CEO, replacing Tom LaSorda just days after the papers were signed — though Cerberus had said that LaSorda would have a chance to prove himself. There seemed to be very few people within Chrysler who were not dismayed and, often, frightened by this choice. Nardelli’s record at Home Depot has been criticized; at a May 2006 Home Depot stockholder meeting, he limited shareholders to one minute of speech each, and refused to answer any questions.
The Wall Street Journal wrote, according to “tkl_one,” that: “The investment bankers wanted Chrysler to start cutting expenses on a fast track and demanded a cost-cutting executive be brought in. Initially, there would be two leaders (Bernhard and Nardelli), but Bernhard saw the handwriting on the wall, saw that Nardelli would be the guy really in charge at Chrysler, and he would make the calls on what programs to keep vs cut, and how deep the cuts will be made. As well as make quick deals with low-cost (Chinese) auto makers.”
On the other hand, hiring Toyota North America’s Jim Press, who is now co-President and co-Vice Chair with Tom LaSorda, as well as the former head of Lexus marketing, was an indication of continued investment and confidence; Press’ compensation package was estimated as being a $50 million stake in the company if it is successful.
What Daimler gets out of the deal
DaimlerChrysler can change its name to Daimler AG (what happened to Benz?) and run their bus, van, and car companies without distraction, while raking about 20% off of Chrysler’s profits. At the same time, Mercedes’ dependence on Chrysler for volume discounts and royalties on less than ideal parts can continue for the near term, at least; joint purchasing and drivetrain development will continue, and no doubt Chrysler will keep paying royalties for five-speed transmissions while Mercedes will get free access to next-generation V6 engines. A Joint Automotive Council of board members from each company will be established so both sides can decide on new and current projects.
The new company
An affiliate of Cerberus, Chrysler Holding LLC, will own 80.1% of Chrysler Holdings LLC, while Daimler will own 19.9%. Chrysler Holdings LLC includes Chrysler Corporation LLC and Chrysler Financial Services LLC. Tom LaSorda, Eric Ridenour and Tom Sidlik will leave the Daimler Board of Management, which will go down to six members.
Cerebrus gets a company with a history of profitability, next-generation technology waiting to be implemented, some of the world's most advanced, flexible auto plants, a huge number of dedicated, experienced, intelligent employees, and the consistently-profitable former Chrysler Credit (which may actually have a surprise loss soon due to a number of less than ideal loans in the recent past), all for agreeing to put reasonable sums of money into their own businesses and for making a relatively small payment to Daimler.
Tom LaSorda, Dieter Zetsche, and Cerberus managers (including CEO Steve Feinberg and Wolfgang Bernhard) met with senior management on May 15 (a single day after the announcement). The Pentastar will be the corporate logo, saving a considerable reglazing fee for the Chrysler Technical Center. Dieter Zetsche said that his years at Chrysler were the best years of his career and his life, but that the differences between Mercedes and Chrysler made real integration impossible. The two companies will continue to share items like diesel engines, 4x4 components, hybrids, and fuel cells, he said.
Steve Feinberg called his company a blue-collar capital investment firm that stresses long term growth, calling Chrysler a once in a lifetime opportunity and saying he wanted Cerberus to have the legacy of helping Chrysler to flourish. He did not provide a clear role for Wolfgang Bernhard, who was present, and said he would quickly trade in his Chevy pickup for a Ram. He did not see any vertical integration with Cerberus suppliers. He also noted that naming the company after the dog-guard of Hell was a huge mistake.
Some reasons we’re happy Daimler will be history
The problem with Chrysler since 1998 has been running the company for the benefit of Mercedes, not for the benefit of DaimlerChrysler as a whole. Getting out from Daimler is a plus; Chrysler has been cut to a third of their prior size and have been constrained in what they can make. The question is never "what would make a good profit," it's "what can Mercedes use and what can use Mercedes parts" (with a huge dose of “no, that might take away Mercedes sales.” Money was spent on a Crossfire replacement when we need a Neon replacement, and building the LX and JS to Mercedes architectures no doubt increased their weight and cost. The Mercedes five-speed automatic is more expensive and less reliable and lower performing than the ZF automatic, from what I've been told - not to mention Chrysler's own five-speed truck automatic, which is eminently usable on cars (having been developed from the ancient TorqueFlite).
Though (as of May 16, 2007) we're sure there are plenty of strings attached to this deal, Chrysler will be run by people who want to make money, not transfer profits to another division's budget line and pretend they're losing money, as it appears Daimler has been doing. Just as you wouldn't want Toyota to make the Corolla a downsized Lexus LS, you don't want the Sebring to be a downsized S-Class just to lower the component costs of the S-Class. That's one of the things that killed GM - according to DeLorean anyway - was when they lowered Caddy and Olds costs by making Chevy and Pontiac accommodate them. Yes, it lowered the total number of parts in inventory, and yes, it made parts cheaper for Caddy and Olds, but it also made Chevys and Pontiacs too heavy and expensive to make!
Another good thing to come out of this is, hopefully, the removal of the German (and American!) "cost-cutting experts" who have made Chrysler's cars less competitive. [Though with the choice of CEO, things might stay the same or get worse.] Maybe Chrysler can start to add back in all those things that made their vehicles special to their owners - things like comfortable seats and windshield wiper de-icers for minivans, not to mention four-cylinder engines that produce some torque at low rpm. One particular rapid cost-cutter is certain to remain in Stuttgart. And we're probably not going to see any more "German engineering" ads!
Reason for hope
We have reason to hope. Perhaps Wolfgang Bernhard does know how to do something other than slash jobs, close factories that later turn out to be needed, and make specialty sports cars. Tom LaSorda might be a pretty good leader when his leash is taken off; he’s getting to be well liked, at least. We know that Chrysler still has many good, dedicated engineers, and we also suspect that many employees will work much harder for an independent, American Chrysler than for an amorphous, money-sucking, abusive DaimlerChrysler.
I think anyone with the cash to buy Chrysler would be nuts not to, and that they don't need to strip the company to turn a quick profit - particularly if they plan to resell when the record profits return.
There's not much left to cut, anyway. They could sell factories, but there's only one plant that's underused right now; the others are all very much needed. Even the under-used plant could be used to build the cars they need to be selling, the Corolla/Neon class that was abandoned in favor of the cute-ute Compass/Caliber/Patriot. The basic research departments were decimated by Daimler already. Anything they cut now would just eliminate their profits later, unless they plan to move everything to China, and that's been turning out to be less than ideal lately - a short-sighted strategy if ever there was one (not unlike Daimler's providing Hyundai with the one key technology, engines, they needed to become a real threat).
Cerberus has profited from its ties to key Republicans, and in one case, a timely $110,000 donation to suspect congressman Jerry Lewis was almost instantly rewarded with the renewal of a controversial $1 billion contract and the firing of US Attorney Carol Lam, who was investigating Lewis' contributors (presumably including Cerebrus).
Cerberus appears to have set itself up as a member of the “pay to play” politically-based contracts game, and owns IAD, the company (with five former Halliburton executives on the board) accused of mistreating wounded veterans at Walter Reed and numerous other rather nasty activities.
The moral concerns we have about Cerebrus (and for that matter the "all that matters is short-term profit" reputation of some private equity firms) do not necessarily affect their ability to run Chrysler, and in any huge company, there can be some highly moral and some highly immoral divisions. A few bad apples doesn't necessarily poison the entire farm, and it's a huge farm.
There’s even a lighter side to the political machinations. They might be able to buy Chrysler some military contracts for Jeep and Dodge trucks; and they are putting serious money into the company. What's more, they are getting Chrysler Financial in the deal, which should make Chrysler profitable without slashing.
Tom LaSorda is reportedly to remain CEO, but Wolfgang Bernhard, the slash-and-burn, flashy Mercedes man, will most likely be running the show from behind the scenes. On the lighter side, Bernhard is "a car guy," which might mean more enthusiasm for the company; on the darker side, there is no reason to believe he is steeped in Chrysler history or has any better ability to run a mass-market automaker than DCX did. Though Chrysler might see Firepowers and Tomahawks, it might not see the Reliants and Spirits that sold in huge numbers (or, in modern terms, Corollas and Camrys), and it can’t keep the factories running with exotics.
Also in Cerberus’ stable is David Thursfield, who ran Ford's highly successful operations outside the Americas before joining Cerebrus in 2004; Robert Rewey, also of Ford; and Gary Dilts, Chrysler's former top sales executive and member of the “dream team” that engineered the 1993-1998 golden years.
Cerebrus does appear to have a record of turning companies around and being in the game for the long run; they’ve sometimes been contrasted to the standard slash-burn-flip private-equity firms. Cerebrus already owns 51% of GMAC Financial Services and is buying out Tower Automotive, a parts supplier; it also owns Guilford Mills, a large American auto-seat supplier in the U.S., and Peguform Group, a German auto-plastic maker.
If you know more about Cerebrus and the players, please post it here in the comments.
An alternative that might have pushed DCX to go faster
Even as Cerebrus was buying Chrysler, Kirk Kerkorian was apparently meeting with the plant workers in Toledo who wanted to take Chrysler over in an employee buyout. They would have raised investment funds using Kerkorian and the sale of stock to buy Chrysler from Daimler. The plan was moderately far advanced, but it appears that Daimler would never have agreed to sell to the employees, Kerkorian, or both, and the UAW and CAW provided no support for the plan, preferring to back the private equity firms (even Magna was working with a private equity firm, albeit one with a solid reputation).
Looking to the future
Chrysler is likely to do much better under Cerebrus than under Daimler. New products should be lighter and cheaper to build without the need to build to Mercedes specifications, and without the need (at least on future vehicles) to use Mercedes components even when they are sorely outclassed by cheaper ones. The horrific German Engineering ads which decimated sales will disappear, and Chrysler will not be publicly criticized and dragged into the dirt by their new owners. The anonymous leaks from Mercedes directors on how terrible Chrysler is (ignoring the fact that Mercedes gets lower quality rankings in just about every survey) will end, and the stigma of owning a Chrysler will fade. Unfortunately, on August 8 2007, the head of the Chrysler museum posted a weblog entry that should lay to rest any hopes of a Plymouth revival.
Cerberus generally succeeds not by strip-and-flip but by rebuilding companies that have been terribly managed (or, apparently, through corruption in some cases). Chrysler has been terribly managed for most of its life.
Being an American company again means that if they DO go public again, their stock will be purchased by index funds again, and that'll be good for an instant boost.
Only the future will tell us what will happen with Chrysler, and that future is still far off, in the third quarter - and we might not know what's really in store until 2008. Let's hope it's good news and not bad news. I, for one, think it would be hard, though not impossible, for Cerebrus to be worse than Daimler.
On August 3, 2007, the deal was finalized. Tom LaSorda sent this message:
Today is a landmark day in Chrysler’s history. With the signing of a contract, it’s now official: we are part of the Cerberus family.
This completion of the deal marks the beginning of a historic opportunity for us to build a company that can compete with the best in the world. It’s truly a day to recommit the full talent and passion of our great people!
There’s a lot to be excited about, and on Monday we’ll take some time to celebrate our beginning as a new company. I know that in some parts of our organization the transition to The New Chrysler will take time, with new legal entities to be formed, and even new offices to be established in some places. But regardless of location, everyone at The New Chrysler can look forward to a unique and exciting opportunity ahead.
After months of uncertainty, then a period of transition, we are beginning a new chapter in Chrysler’s proud history -– and we have the chance to write a terrific story. With Cerberus, we have a new majority owner focused on our long-term success. And with Daimler retaining a significant minority stake, we have a strong automotive partner with which we share several common projects and strategic interests.
We are now a privately held company, a status that will generate significant benefits as we rebuild our business. Going private means we can bring a laser-like focus to our business and make the long-term investments needed to compete, free from financial market pressures to generate short-term results. We also will be more open to new partnerships and alliances, and will be able to move faster to leverage these opportunities to accelerate our growth.
Going private does not mean going silent. We will continue to actively engage our employees, dealers, suppliers, community leaders and other stakeholders to enhance our competitive situation. Our commitment to diversity in our work force, supply base and dealer network will be stronger than ever as we focus on growth in our home and international markets. The Chrysler Foundation, newly named to reflect our new structure, will continue to support charitable organizations in communities where we live, work and do business. We pledge to continue our proud heritage as a "Good Neighbor, Good Citizen."
In addition to Chrysler, Cerberus has significant investments in more than 50 companies that generate more than $60 billion in revenues worldwide. Cerberus has a deep pool of operational expertise that we can draw on to face our challenges and achieve our goals. Our new owners have high expectations of performance and have expressed confidence that we can get the job done.
To sum up: we have a fresh start, with a clear mandate for success. Now it’s up to us to make it happen.
We already have begun implementing our blueprint for success -– the Recovery and Transformation Plan (RTP). The RTP is not just an initiative –- it is how we will run the company in the years ahead. The plan addresses every area of our business and increases accountability for results. The RTP also evolves our business model to sharpen our focus on products and brands, to accelerate global growth and to leverage alliances that allow us to react quickly and efficiently to opportunities around the world.
Today, the distractions of the past few months are gone. We can -– and must –- focus on the aspects of our business that will ultimately determine our success. We must create great products that our customers are proud to buy and an ownership experience that keeps them coming back. Our quality must exceed the expectations of our customers –- because in the end, their opinion is the one that matters most. Simply put, quality must be in everything we do. We must deliver on our commitment to increased fuel economy and advanced powertrains, such as our new series of fuel-efficient V-6 engines, while also embracing other efforts of environmental stewardship. To profitably grow our business, we must build our presence in emerging markets and in those countries where we currently have only a modest presence. And we will continue to develop more alliances and partnerships to support these efforts.
Together, we have a bright future to look forward to as we bring together the tremendous capabilities of our people in common purpose. And 100 years from now, people will look back on this day as the rebirth of a truly great company.