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2007-2009: Chrysler Under Cerberus

On May 14, 2007, Cerberus announced that it would buy 80.1% of Chrysler Group, including Chrysler Financial. The private-equity firm had signed on ex-Chrysler people as advisors, including lauded designer Tom Gale, former sales chief Gary Dilts, past Chrysler Financial president Jerry Farrell, past Chrysler Financial CFO Thomas Gillman, and Mercedes ex-pat Wolfgang Bernhard (who ended up returning to Mercedes).

Daimler kept the rest of the new “Chrysler Holdings LLC,” but Tom LaSorda, Eric Ridenour, and Tom Sidlik left the Daimler Board of Management, and DaimlerChrysler quickly renamed itself Daimler AG.

Just before the transfer took place (on August 3, 2007), another 13,000 jobs were eliminated. However, on August 4, the new Chrysler web site declared “Get ready for the next hundred years.”

The plant signs were changed, slowly, starting on August 1, 2007, often by local employees or managers covering up the “Daimler.” Labels (including on parts and boxes), brochures, and stationery were updated as they ran out, so that cars were labelled DaimlerChrysler in numerous places until Fiat took over.

In an Automotive News interview, Frank Klegon said that Daimler and Chrysler would share electrical architectures (with a new, jointly engineered architecture due around 2011) and SUV chassis components. Mr. Klegon seemed very happy that Chrysler would have more freedom to work with other automakers and suppliers.

The options

There were three major competitors for Chrysler. Cerberus was most likely chosen partly for their political pull, and partly because they were most promising for continuing joint projects with Mercedes. A cynic may say that Juergen Schrempp wanted a company that would destroy Chrysler rather than making it into a success, which would make Daimler look bad and give them another competitor. (Daimler allegedly kept access to the Viper design, and to the next-generation “Pentastar” V6 engines.)

Kirk Kerkorian met with plant workers in Toledo who wanted to take Chrysler over in an employee buyout. Their joint plan was advanced when the Ceberus deal was announced.

The DaimlerChrysler era

Canadian parts-maker Magna had wanted to go into the full-on auto business, and had experience in automotive assembly in Europe. They were working with a private equity firm with a less controversial background.

In February 2008, according to Detroit News, private equity firms including Apollo Management, Blackstone Group, Carlyle Group were also invited to purchase Chrysler before the announcement that the division was for sale.

Initial Reactions and Reality

Employees, dealers, and potential buyers were excited by the deal. Allpar experienced an unusually favorable response to the buyout, with many breathing a sigh of relief that the Daimler nightmare was nearly over. Reactions were overwhelmingly positive on other forums, with the most notable dissenter being Employees were excited, customers were excited, even some normal Americans had heard that Chrysler was coming back.

Those who were not involved at the time are probably unaware that, from early in the “merger of equals,” Chrysler had been run for the benefit of Mercedes, rather than DaimlerChrysler as a whole. Chrysler was cut to a third of its size, its cars altered to provide Mercedes with increased purchasing volumes (or royalties), even its advertising changed to emphasize “German Engineering” — which cut Chrysler sales but benefited Mercedes (and Volkswagen).

Cerberus allegedly did not care so much for Chrysler profits as Chrysler Financial profits, since they apparently intended to sell Chrysler and keep Chrysler Financial, which was more profitable and more stable.

In May 2007, it appeared that Cerberus would run Chrysler to make money, not transfer profits to another division's budget line. Allpar and others also believed the “cost-cutting experts” who had made Chrysler’s cars less competitive would be dismissed.

Nardelli was bought out of Home Depot with $210 million, after cheapening products with replacing full time people with part-timers for temporary profit increases, both causing plummeted customer satisfaction.

That positive reaction died out nearly completely when Robert Nardelli was hired on as CEO, replacing Tom LaSorda just days after the papers were signed (August 6, 2007). It seemed that few people within Chrysler were not dismayed and frightened by this choice. He and his team shared a common desire to outsource manufacturing to China.

Well-respected executive Eric Ridenour left just after Bob Nardelli came in.

Hiring Toyota North America’s Jim Press as co-President and co-Vice Chair, Tom LaSorda, and the former head of Lexus marketing, helped to counter the gloom.

Though the Cerberus people often portrayed themselves as patriots rescuing a great American automaker, Cerberus CEO and multi-billionaire Steve Feinberg did not invest his own money to rescue the company from bankruptcy, and tried to link up with numerous Chinese companies. Talks with Nissan started in 2007; in 2008, Nissan and Chrysler exchanged term sheets, but Nissan could not get the needed financing. (Allpar has been 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, in a court statement, wrote:

Chrysler sent letters to parties, primarily in China, whom we thought would be potentially interested in purchasing our assets [note that he did not say purchasing the company, but purchasing the assets. This may have simply meant intellectual property and trademarks.] Over the next two months, several companies, including 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.

Detroit newspapers wrote that Cerberus also tried to join Chrysler to GM, whose conditions essentially would have involved the loss of nearly all jobs at Chrysler and the dissolution of most of the brands; 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.

Amusingly, 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.

By the end of the month, there were reports in the Wall Street Journal that Chrysler was seeking to sell the Mopar division.

An economic crash late in 2008 combined with high fuel prices slashed demand for Chrysler vehicles, and rumors of the company’s inevitable bankruptcy became self-fulfilling. George W. Bush, then occupying the White House, loaned Chrysler and GM billions to keep them alive until Barack Obama was inaugurated. (He had initially put off a meeting with auto industry leaders, including Mr. LaSorda, to meet with American Idol winner Taylor Hicks and Tom DeLay (later booked on conspiracy and money laundering charges), and to attend a tee-ball game. His indifference reflected the mood of many Americans, despite the large number of jobs that rode on the auto industry.

Bob Nardelli reportedly called Rick Wagoner in January 2009 to try to restart the merger. GM was not interested. However, talks with Fiat, like those with Nissan, had seemed promising; Fiat expressed interest in March 2008. By the time the deal actually came, Cerberus only wanted to hold onto Chrysler Financial, which was a predictable moneymaker.

President Obama quickly set up a team of people to deal with the problem of GM, Ford, and Chrysler, all of whom testified in front of Congress. Ford was able to survive with several billion dollars in low-interest loans; GM and Chrysler were put into a brief bankruptcy, shedding billions in debt along with unprofitable and unwanted properties. Both paid off their new loans (though not the Bush loans) ahead of schedule — these were not by any means low interest loans, either — and the government profited handsomely from their post-Bush investments in Chrysler.

Cerberus and its people

Cerberus was somewhat controversial before the Chrysler deal. Intensely tied to the Republican Party, hiring on Dan Quayle, former Treasurer John Snow, and other politicians with dead careers, they allegedly were in the “pay to play” contracts game; they owned IAD, the 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 himself was a major fundraiser for the GOP, and some said this may have been the reason he was rewarded by being put in charge of Chrysler despite backfires at Home Depot.

Cerebrus did sometimes turn companies around, and publicly boasted of being in the game for the long run. 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 actively sought to sell whatever they could, other than the loan company.

Tom LaSorda’s letter to employees on the Cerberus sale2008 Recovery Plan

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