By on May 14, 2007

cerberus2.jpgIn Greek mythology, Cerberus guarded the gates of Hades. Anyone who challenged the three-headed dog was ripped to shreds. In American business, the Cerberus private equity group guards the investment firm’s cash. Unlike the mythical canine, they don’t wait for foolish interlopers. They seek out struggling companies and rip them to shreds– sorry, “turn them around.” For reasons yet to be revealed, the United Auto Workers (UAW) have welcomed today’s announcement that Cerberus has purchased Chrysler from its German overlords. Is someone about to teach an old dog some new tricks?  

Ever since DaimlerChrysler’s management announced they would practically give Chrysler away explore all options for resolving Chrysler’s financial problems, the unions have fiercely opposed the automaker’s sale to an equity fund. UAW President Ron Gettelfinger listed it as the least desirable scenario possible.

Canadian Auto Workers’ (CAW) president Buzz Hargrove was more succinct: "We're absolutely opposed to any private-equity firm. Anyone who takes [Chrysler] over has to respect our bargaining agreement and respect our members. There's no room for cutbacks."

Cerberus is no stranger to union intransigence. The group’s play for bankrupt auto parts supplier Delphi floundered of the rocks of the UAW’s refusal to make any significant wage, pension or health care concessions. Like the belligerent, limbless knight in Monty Python’s Holy Grail, the severely denuded Delphi workforce was itching for a fight. Cerberus walked.

Now that Cerberus has purchased Chrysler, the UAW suddenly wants to come across as a team player. In a UAW press release, Gettelfinger stated, "The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler. We are pleased that this decision has been made, because our members and the management can now focus entirely on the development and manufacture of quality products for the future of the Chrysler Group."

Just how willing the UAW is to “focus on… the future of the Chrysler Group” will become clear this September, when contract negations begin. Earlier today, DaimlerChrysler Chief Executive Dieter Zetsche said the sale was "not conditional on any aspects of a collective bargaining agreement." So the gloves are still off– especially over at the CAW. 

The CAW’s president, who represents about 10k Chrysler workers, is adamant he “can't imagine anything to convince me this is in our best interest." Buzz told the press that he was upset because no one contacted the CAW about the pending Chrysler – Cerberus deal. "There should have been some dialogue." 

Dialogue. Right. In fact, the Mexican standoff between Chrysler’s unions and its owners continues. Except this time, the union faces Cerberus’ fangs.

If the unions threaten to strike, they may have to put up or shut up. Cerberus is flush with cash. With a (relatively) small amount of cash invested in Chrysler, Cerberus could let the plants sit idle until the unions cave. And if the unions don’t?

They could resort to the dreaded “strip and flip” for which investment firms are so well known. Cerberus could disassemble Chrysler and hold their own fire sale, divesting themselves of most of the current operations. It wouldn’t take much for Tower Automotive to absorb the profitable Jeep division. Jeep and/or other automotive divisions would go to the highest bidder, most likely a Chinese or Indian company wanting to set up a U.S. operation.

It’s important to keep in mind that Chrysler Financial is the crown jewel in Chrysler’s moth-eaten Empire. It’s the only other part of the Chrysler Group that actually makes money. Cerberus already owns 51 percent of one finance company, GMAC. Would they take the cash they get from Daimler as part of the deal, use it to bail out GMAC then roll it and Chrysler Financial into The Mother of All Finance Companies? You betcha.

In fact, it seems logical that Chrysler Financial is Cerberus’ “real” target in all this. After all, what does a private equity firm know about designing, engineering, building, distributing and selling cars? Nothing. This brings us back to where we were before Cerberus made its move: Magna.

Canada’s Magna International is all about building cars. They were the only bidders for Chrysler talking about working with the unions, building new products, yada, yada, yada. Only owner Frank Stronach was adamant that he didn’t want to use his own money. So…

Cerberus sells the automaking end of the business to Magna.

It’s not a bad plan. Let Frank sort out the UAW, Cerberus banks some big bucks with GMAC and Chrysler Financial (Cerberus LOVES cash flow) and turns Chrysler into a lean, mean, distribution machine. Chrysler could buy products from China, India, Canada, wherever, and then use Chrysler’s dealer network to move the metal. 

Does all this mean Frank Stronach will become the legendary demi-god who tamed Cerberus? Stay tuned.  

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65 Comments on “Chrysler Suicide Watch 15: Does Cerberus’ Chrysler Purchase Portend a New Paradigm?...”


  • avatar
    windswords

    I’ve been reading all the news reports I can get my (computers) hands on. Plus reading lots of comments on various blogs. Now this. My head is spinning. One question: Daimler still retains a 20% ownership of Chrysler. Does anyone think that Daimler would let Cerberus “strip and flip” Chrysler? I’m guessing they are still going to collaborate on some engineering or other endeavors, else why retain any ownership at all?

  • avatar
    starlightmica

    I guess it’s too early to reset the Suicide Watch Counter. Lots of drama still in motion, lots of division to be parted out, September negotiations yet to come. Jeep is worth billions, but the rest? TTAC could probably buy a mothballed plant or two if we click on a few more ads.

    In the meantime, we have the return of the Big [Detroit] Three: GM, Ford, and Cerberus (for now). Strip & flip? When money’s the object, nothing need stand in the way.

  • avatar
    Hippo

    It sounds unusual. Makes one wonder how large a few UAW leaders Swiss bank accounts are now and whether they will be able to visit Germany in a year or two (German law is most definitely NOT like US corporate law).

    Presumably Daimler has good enough lawyers to make sure they have no possible liability when the new Holding Co goes into Chapter 11.

    Daimler isn’t my favorite German company, but looking at it strictly as a intellectual exercise a big part of selling Chrysler had to be a total disassociation when the union is forced into a strike and oblivion.

    People on the street don’t care about legal aspects, without basing this on anything other then gut feeling IMO Daimler risks losing the PR battle on the US street, and if this is the case then the whole sale is a Pyhrric victory considering any possible the most likely confrontation with the union is only a few months away.
    Or maybe Daimler is upmarket enough where this isn’t a factor.

  • avatar
    jthorner

    One question: Daimler still retains a 20% ownership of Chrysler. Does anyone think that Daimler would let Cerberus “strip and flip” Chrysler?

    I suspect that the 20% ownerships stake is both a face saving move for Daimler (soon to be back to it’s old name Daimler-Benz I would bet!) and is a condition Cerberus wants for ongoing access to certain powertrain and other components. Don’t be surprised if that 20% goes away sometime in the future though.

    20% gives Daimler zero control over decision making. If Cerberus wants to strip and flip there will be nothing Daimler can do about it. There might even be a scenario where Daimler trades it’s 20% for certain assets of Chrsyler, though I can’t imagine what they would want that Cerberus would be willing to part with for that 20%. In short, the 20% retained ownership is window dressing.

    The game certainly will be interesting to watch. In the short run we can expect Cerberus’ National and Alamo rental car chains to be VERY heavy on Chrsyler products. Imagine explaining to the owners why you want to buy from GM and Ford instead of Chrysler …..

    Five years from now the DaimlerChrysler years will be but a footnote in automotive history. I suspect that by that point over 50% of the products being sold with the Chrysler-Dodge nameplates will be imports. Small and medium cars from China, large cars from Mexico, small trucks from India, large trucks from Mexico, light commercial vehicles from Eastern Europe.

    Ten years on I will be surprised to see a single US assembly facility making anything that says Chrsyler or Dodge on it. The UAW and CAW will probably be out of the picture entirely. Jeep remains a wildcard with a Chinese buyer, perhaps the current China joint venture partner, being to most obvious place for it to go.

    Get some popcorn.

  • avatar
    jthorner

    People on the street don’t care about legal aspects, without basing this on anything other then gut feeling IMO Daimler risks losing the PR battle on the US street

    This sounds like an argument about revolutions in South America. In the US the “people on the street” are a small group and pretty much irrelevant to major decisions. The folks who are buying Mercedes Benz products in the US probably would buy more of them if the UAW shut down Chrysler. New car buyers have jobs and aren’t street people living day to day on handouts.

    The UAW now represents such a small fraction of the US workforce that it really isn’t a political force of consequence anymore. Look at the fact that the UAW and CAW were completely opposed to the Cerberus takeover. Even inside the DaimlerChrysler world their voice amounted to nothing and solidarity with the German Union Just-Didn’t-Happen.

  • avatar
    foobar

    Can someone explain why a Chinese or Indian company would be the presumptive Jeep buyer? Why not a Japanese company looking for inroads into the US truck and SUV market (say, one that’s recently been trying to market its own pickups more aggressively to ‘Murican buyers)?

  • avatar
    Geotpf

    foobar: Toyota doesn’t buy other automakers not based in Japan. Period. Never has, never will. They don’t even take partial stakes. Now, they have bought all or part of Daihatsu, Hino, Subaru, and Isuzu, but those are all from the land of the rising sun.

    jthroner: Gettelfinger has a seat on Daimler’s advisory board. I imagine he could have blocked the purchase if he really tried. He must know something we don’t, because it doesn’t make any sense for the UAW to like this deal.

  • avatar
    Hippo

    jthorner
    I think we agree on the basic premise (note the last sentence in my original post) but you are missing a large segment of the US population. Blue collar tradesmen and small businessmen that are financially very successful, at least much more then some elements of left leaning academia, on which flag waving is very effective even though they realize that they may not be buying the best product.

  • avatar
    Luther

    “(soon to be back to it’s old name Daimler-Benz I would bet!)”

    “Daimler AG” is the new name.

    “Chrysler Holding LLC” is the new holding company setup by Cerberus. I don’t fully know the significants of an LLC (Limited Liability Company) in terms of corporate law (Other than the tax advantage). Anybody? Would an LLC have an advantage in bankruptcy court of other legal proceedings?

    Interesting how Gettelfinger changed his tune about this “strip-n-flipper. Maybe Cerberus is going to actually try to operate Chrysler intact…Also interesting that Buzz[ard] was not in-the-loop with his “brother” Gettel[middle]finger…Solidarity my butt.

  • avatar
    Hippo

    Luther,

    I’m not a lawyer or even slept in a Holiday Inn Express last night, but it is my impression that the LLC legally shields all the assets of the individuals running the place as well as both Cerberus and Daimler assets, ie the only liability is assets of the Holding Co itself.

  • avatar
    Gardiner Westbound

    Buzz told the press that he was upset because no one contacted the CAW about the pending Chrysler – Cerberus deal. “There should have been some dialogue.

    In two or three days Hargrove’s thought processes will catch up with reality. Cerberus has subtly put him in his place.

    The one-trick pony has run out of tricks. Bluff and bluster won’t cut it with this bunch.

  • avatar
    Thomas Minzenmay

    I’m not a lawyer or even slept in a Holiday Inn Express last night, but it is my impression that the LLC legally shields all the assets of the individuals running the place as well as both Cerberus and Daimler assets, ie the only liability is assets of the Holding Co itself.

    In that case it’s pretty easy. The Unions are in Cerberus hands. They either agree on massive cutbacks, or the Chrysler Holding will be stripped of all its assets and moved into bankruptcy.

  • avatar
    Steven Lang

    If the job of Cerebrus can be summarized into three tasks it would be…

    1) Integrate Chrysler Financial into GMAC

    2) Minimize long-term pension and health care costs by whatever reasonable means necessary

    3) Reduce plant capacity

    4) Consolidate the number of platforms and focus on specific niches for the company’s internal operations.

    5) Seek joint ventures for automakers that want to do business in the American market, and are willing to share their resources with them.

  • avatar
    my12by60

    Chrysler Sold for $7.4B??? Not really. —

    The headline say one thing but the deal terms say another. This reporter is confused. Cerberus is investing $6.05B in Chrysler, the company which it will own 80% of. Investing capital in a company that you buy and own 80% of is not the same thing as handing money to the seller as part of a purchase price. DCX sold 80% of Chrysler in exchange for no net cash at closing.

    From AP article today:

    >

    So when the dust settles, Chrysler gets no money at closing but does retain a 20% interest in the equity of the new Chrysler. So DCX is really giving away 80% of its ownership in Chrysler for nothing other than the hope that the new owner might be able to create some equity value (no equity value exists now, as proved by these sale terms) in which case DCX’s 20% stake might have some value somewhere down the road.

    What I think is happening:

    DCX knows that the UAW packages need to be drastically re-written to allow Chrysler to cash flow. Doing what needs to be done with the UAW is likely to lead to a strike and a BK filing by Chrysler. This deal is timed so that Cerberus (more of a BK specialist than DCX) can do the dirty work that DCX did not want to do with the UAW. Cerberus will have $6B tied up in Chrysler. But that money won’t just be wasted if Cerberus can get Chrysler into BK shortly after the projected closing of the deal with DCX and shortly after the expiration of the existing UAW contract, both of which will occur during Q3 of this year. Between the cash contributed into Chrysler by Cerberus and some DIP financing, Cerberus will have a nice war chest to work with during the BK period while the cost structure of Chrysler is gutted, pieces are sold, or whatever else Cerberus has in mind.

    Implications for GM:

    GMNA is worthless and GM would likely have to pay someone to accept the equity and the liabilities that go along with owning the equity of just the North American auto business. At the holding company level, GM does own 50% of GMAC and its foreign subs which both have equity value, although the market value of the remaining half of GMAC has taken a big hit lately with the subprime fiasco. I still don’t see enough value in the other pieces to offset the horror which is GMNA. GMNA needs to be filed and restructured. How long will GM management continue to take cash flow from the good businesses to fund the problems (mainly stemming from UAW wage and benefit packages and work rules) at GMNA? Until all GM liquidity is gone? Or does GM file GMNA if UAW negotiations fail to produce meaningful cuts later this year?

    We could see some real fireworks in the NA auto business later this year with Cerberus now in the game.

  • avatar
    andrewg

    What is the total loss to Daimler over the last ten years? $36b to buy Chrysler (in Dollars worth more than the dollars of today) and $650m to get rid of it, plus any net operating losses, if any.

    An interesting future thread: how will Daimler recover from the loss of so much accumulated wealth? What will they look like ten years from now?

  • avatar

    All I can say is woof. Call me old-fashioned (go ahead, do it now), but I’m still a nationalist and a centrist, and I believe that Chrysler should never have been allowed to be sold to a foreign interest in the first place.

    This is all a bit unsettling, but maybe it’s just what the NorthAm manufacturers need – a swift kick in the ass from some folks who actually know something about obtaining a positive cashflow. If the end result is that the big labor organizations get their backs broken so that the Big Three can become a monetary, creative and economic force again, then I say “full speed ahead” – should have happened long ago, and collective bargaining be damned. And to the legislators in DC – keep your rum-sodden noses out if it and let the marketplace do its thing.

  • avatar
    Hippo

    my 12 by 60

    Your assessment is fair. I have seen more detailed reporting on the deal in the German press.

    The main point is that Daimler claims that there is a ironclad part in the agreement that Cerberus is taking responsibility for all the future pension and medical costs (80bn?). This is the #1 thing Daimler wanted.

    Further the 6bn investment by Cerberus is going mainly for a new engine plant and a new axle/transmission plant with part of the production going to Daimler (hence the 19.9%)

    So? whatever Cerberus puts into it will be over time, and the time frame remains to be nailed down, so if they go chapter11 in summer they will not yet have anywhere that money (if anything) into the deal. Daimler can later get the axle plant for their 20%, Cerberus gets to be the executioner and walks away with Chrysler financial and Jeep.

    Damn, got to love American corporate law, compared to these guys Jesse James was Mother Teresa, too bad I was born into the wrong family. LOL.

  • avatar
    Infamous Dr. X

    Hippo, Thomas, et al

    You are essentially correct on the LLC summary. The idea is that both Cerberus and Daimler AG are 100% liability free should anything nasty befall Chrysler Holding, LLC.

    Based on my understanding (I manage an LLC on behalf of a larger umbrella group), there are several reasons to do this:

    1.CH LCC operates to generate revenues and profits, like any other business. Quarterly, annually (whatever), CH LLC will make a consolidation payment to the parent company – in this case, 20% to Daimler, 80% Cerberus. This comes out of revenue, and to an extent, cash.

    2. If Chrysler Holdings, LLC is sued, only CH LLC is liable for any damages or settlements. Nothing owned (cash or assets) by Daimler or Cerberus can be touched by plaintiffs or awarded as a settlement. Because of the consolidation payments, then, this is a manner of managing risk – if Cerberus and Daimler leave CH LLC only enough cash and assets to operate, they are reducing their fiscal risk.

    3. Should CH LLC go into bankruptcy (as everyone seems to think they will) then again, only the cash & assets of CH LLC are at risk. Once in Bankruptcy, as smarter people than I have mentioned, CH LLC can (ahem) “take care of business” with the unions, etc. When CH LLC emerges from bankruptcy union-free, restructured, the revenues and profits will flow from the new, lean, mean CH LLC.

    In effect, if I understand these events properly, Cerberus paid $6B+ for 80% of all future profits derived from 1) Chrysler Financial, 2) automaking operations, and/or 3) cash realized on sale of portions or all of the automaking operations.

    It’s been a long day, so I may have it all wrong, but I’m pretty sure that’s the story.

  • avatar
    trosselle

    Let’s pretend that is September and the UAW and Cerberus talks break down and the UAW goes on strike. I was involved in a similar situation at a printing plant several years ago and the management just brought in replacement workers and kept the plant running. To this day I think the union is still on strike and the plant is still running with replacement non union workers.

    My question: Can this happen at Chrysler plants?

    Perhaps either an another editorial or a reply to this what are the laws involving the union management relationships in the auto industry. In my situation when the union went on strike management determined that the contract had expired and they had the right to hire replacement workers. State law supported that according to management.

    The other area of question for me is how difficult is it for a company like Chrysler to terminate the dealer franchise agreements. Can somebody explain this?

  • avatar
    mikey

    Dr x and 12X60
    You guys frankly scare the crap out of me The real scary part is I think you guys know what your talking about
    Where I get confused is bankcruptsy laws.Can I judge just wipe out a collective agreement.?how about pensions?does it mean 35yrs mean s.f.a?
    If so why havn’t they done it at Dephi?
    All of this is going down in the next 6 months or so?
    We the masive blue collar workforce and retirees are gonna take this hit.
    With all due respect I hope all of you and RF are dead wrong in your predictions.But I got a gut feeling your all right on the money.
    God help us
    Michael

  • avatar
    Hippo

    Do you know what the difference between the Chinese tank on Tiananmen Square and the American stretch limo on Wall Street is?

    The tank stopped.

  • avatar

    Wow. And I thought the political blogs had passion.

    As a “Jeep lover,” capitalist, former union member and industry observer, allow me to put in my 2 cents worth…

    Here’s what’s wrong with the Big 2.5 (uh…now the big 3 again?) in general:

    1. Bad management – they’re not building what customers want, and making stupid decisions at every level.

    2. Union intransigence – The labor unions, with their “us vs. them” mentality don’t see that their contracts (wages and benefits) are bleeding the manufacturers dry.

    3. Selfish investors – they want profits – NOW – and are only interested in strategies that offer immediate fixes…not long-term solutions.

    4. Too many dealers – the dealer network needs pruning, and the manufacturer’s hands are largely tied, and can’t do what needs to be done.

    5. Buyers spoiled by rebates – margins on small cars are non-existent. Rebates kill whatever profits exist. Buyers have become addicted to rebates and discounts. The manufacturers don’t have the guts to wean them off the dole.

    6. Too much product, too little demand – when you can’t close factories/lay off workers/retool to build only the popular models, you can’t respond to the market. You end up making too much of what you can’t sell.

    I don’t think any reasonable person would disagree that these six problems (in varying degrees, depending on your perspective) are the root of the mess the U.S. auto industry finds themselves.

    Nothing has been solved – so far – because nobody’s got the cojones to fix the problem…and none of the “stakeholders” are willing to consider “taking one for the team,” unless everyone else does so at the same time. In effect, each stakeholder expects the OTHER stakeholders to fix the problem and feel the pain.

    The irony is that Cerberus is likely in a position to do just that. They can fire management, force the union into a more reasonable deal, and maybe even do something about pruning the dealer network. I have no idea if they will, but this is the first time I’ve seen any indication of a group that might – might – actually make changes that are more than window dressing.

    Will some people get hurt? Damn straight. It’s a pity that many of those least able to pay the price will be doing so. There will be layoffs, firings, money lost in the market, et cetera. That’s the way business works. The laws of the free market cannot be thwarted (for very long) before they come back to bite you in the lower posterior region. The good news is that, if Cerberus can pull this off, what will eventually emerge is at least one U.S. auto maker that can once again become a lean, mean, manufacturing machine.

    Know this: the alternative to fixing the problem is not to maintain the status quo. It is indefensible and unsustainable. It’s fix it or die. I, for one, hopes Cerberus is successful, and finds a way to make Chrysler/Dodge/Jeep healthy once more.

  • avatar
    Luther

    Methinks this is a round-about taxpayer bailout scheme.

    Cerberus is, um, a bit politically connected. Chrysler’s legacy costs are going to be funded with profits “earned” thru government contracts. Watch for Cerberus to win a $10B contract to study how close a fly gets to a ceiling before it flips over to land or something. A DOD contract or maybe Dept. Agriculture since Agriculture is the government’s favorite “contract vehicle” for “laundering/fraudulent” schemes. This is the only thing that makes sense to me since Gettelfinger did a 180 turn, very fast, on the Cerberus sale. Gettelfinger would drive Chrysler into the ground before he would consider concessions.

  • avatar
    LenS

    “Do you know what the difference between the Chinese tank on Tiananmen Square and the American stretch limo on Wall Street is?

    The tank stopped.”

    Yes. That tank did stop. But dozens of others went forward and attacked the crowd. And the brave Chinese man who stood there was later arrested and executed with a bill for his execution presented to his widow. Please don’t compare a hero facing a dictatorship with the overpaid, never compromising UAW workers finally facing financial reality at the hands of a hedge fund.

  • avatar
    Infamous Dr. X

    Hippo

    What a stunningly accurate analogy. Brilliant, although frightening and very sad.

    The problems in Detroit aren’t Mikey’s fault – but he’s going to be the one who pays. Totally sucks.

  • avatar
    my12by60

    Mikey and Others -

    My understanding on a few points:

    GM Pensions:

    Money is set aside in a trust outside of the reach of GM and for only the benefit of pensioners. Although GM claims the plan is overfunded, this claim is only based on GAAP rules. In a true economic sense (dollar in the trust account), the plan is underfunded, but not grossly underfunded. If GM filed today and handed the plan over to the PBGC, the plan has enough money to pay all pensioners a decent. To the extent that the plan is short funding, the govt first cuts the pensions of those with the biggest pension benefit. My recollection is that all workers with an annual pension benefit of less than about $40,000 are guaranteed by the govt to get their pension. If your pension benefit is more like $100K per year, then you are at risk of receiving only $40K based on the extent of plan underfunding. Many United pilots had pension benefits of over $100K that were cut more than in half when UAL filed with a grossly underfunded pension plan and handed the plan to the PBGC. I am not an actuary and do not know the extent of economic underfunding of the GM plan. At the time of the PBGC reviewed the GM pension plan and stated that the plan was funded at a level sufficient to fund the minimum pension benefits guaranteed by the PBGC. Bottom line — those with high expected annual pension payments are likely at risk to have their benefit clipped if the plan is handed over to the PBGC in a GMNA BK filing.

    UAW Contracts:

    The GM contract will expire in September. Once the contract is expired, the corporation has no obligation to offer new employment to the UAW. So GM does not have to “wipe-out” or “break” the contract with the UAW. GM can simply let the contract expire on the contracts own terms.

    Delphi:

    The Delphi situation is different in that Delphi has a sugar daddy — GM. GM, and now Chrysler don’t have any party to subsidize a new deal with the UAW. If GM was not on the hook in the Delphi situation, Delphi mgmt would have already moved in the BK court to have the UAW contract cancelled. Instead, Delphi mgmt is happy to pay Delphi workers only what mgmt is willing to offer knowing that GM will have to step and fill the gap between what the UAW wants and what Delphi is willing to pay. This is why GM increased its expected loss allowance for the Delphi matter as part of the last quarterly report. GM can’t handle a parts flow stoppage right now.

    Timing for Problems at GM:

    Tough to say. GM has enough liquidity ($24B in cash account and $16B in VEBA, which is available only for healthcare costs) to last at least a few more years assuming annual cash burn is held in the $6B – $10B range. The question is when does GM’s board pull the pin on GMNA. The board may not be content to see the cash depleted to crisis levels if no hope is in site for a GMNA cashflow turnaround. How Cerberus proceeds to restructure Chrysler’s auto ops will likely be a foreshadowing of what GM will need to do to restructure GMNA.

  • avatar
    Luther

    Thanks Infamous Dr. X for the LLC info!

    I don’t think Cerberus bought Chrysler just to strip-n-flip or Gettelfinger would be screaming right now…Gettelfinger is far too happy about this, which is scary…..

  • avatar
    mikey

    Thanks 12×60 you have answered a lot of questions.
    I think I’m gonna need some beer with my popcorn,to watch the rest of this show.

  • avatar
    Infamous Dr. X

    LenS

    Let’s be fair. I’ll agree that there is a difference between the man in front of the tank and the union line workers. Obviously. However, the analogy does seem apropos.

    The tank and the limo serve different masters but stand for the same thing – a complete and utter lack of feeling for anything but their own needs and goals. The tank serves masters who must keep total control. The limo serves masters who must return maximum value to shareholders. Both will do whatever they possibly can to achieve their ends.

    I would submit to you that neither the tank nor the limo cares much about who gets in the way. Private hedge funds probably have only incrementally more compassion than totalitarian governments. The only difference is that a hedgefund will only destroy you economically.

    Further, let’s keep in mind not all “union workers” are intransigent. Don’t tell me some guy with a high school diploma working on the line, paying dues, and trying to have a life is “the” problem.

    There’s a bit more to it than that (I think we can all agree to that) and I think it’s a bit disingenuous and distasteful to defend the (worthy of defense) victims of Tiananmen while at the same time suggesting that American workers are getting what they deserve.

  • avatar
    mzrunner41

    Another thought on why Daimler is keeping 20% (my guess is that it will be more like 20.1%).

    If LLC dumps the pension plan on the government (pbgc is the agency), federal statute allows pbgc to go after the assets not only of LLC but also any other member in LLC’s “controlled group”. I don’t think that adopting the form of LLC shields anyone in the controlled group from this liability.

    However, to make a parent-subsidiary controlled group, parent (Cerberus) must own “at least 80% of sub.”

    So they adopt this structure, LLC dumps the pension plan at some point and pbgc cannot go after Cerberus or Daimler.

    Retiree medical benefits do not have any similar kind of guarantees under federal law. I’m not a lawyer – but my observation from a few of these in other industries is that the bankruptcy judge has great latitude in allowing changes in retiree medical plans (and can even set aside collective bargaining agreements).

    Mikey -
    The pbgc guarantee for plans terminating in 2007 is $4125/month. If the plan terminates after 2008, it will be a bit higher cuz the limit is indexed. The 4125 guarantee is reduced for:
    1. benefits starting before age 65
    2. spousal survivor benefits
    3. any benefit improvements in last 60 months

    The pbgc.gov website has more complete information on benefit guarantees if you’re interested

  • avatar
    yankinwaoz

    How is this for an idea? Come Sept, GM stops being a car company and instead takes it remaining cash and its health care liabilities, and becomes a large scale medical care provider? Like what happen to Kaiser Steel.

    If they have to pay all those medical expensive anyhow, and it is a growing industry, perhaps they should get in on the vendor side versus the customer side of the business.

    They could leverage all the money they spend on medical care for a large retire population and sell it to other companies.

  • avatar
    hal

    This whole deal is about limiting downside for Daimler in the event Chrysler goes bellyup, the Germans are putting 500M euro of new cash into Chrysler so it’s reasonable to hang onto 19.9% and share in any upside from the restructuring. They will also be well placed to pick up any choice cuts if there is a carve-up.
    This is the last chance for Chrysler and the UAW will play ball and accept a Cat type deal or lose even more dues paying members as plants pack up and move south.
    What I am really hoping is that Cerberus will find a way to eviserate the dealer network and set up new sales and service channels. The car purchasing experience is dire for all but the savviest buyers and really needs fixing. Renegotiating Union and Dealer contracts will remove the 2 biggest obstacles to fixing Chrysler and I bet Cerberus has the balls to do it.

  • avatar
    Luther

    Cerberus owns 80.1% and Daimler owns 19.9%

    I guess this makes it The Big 2.801

  • avatar
    jurisb

    Chrysler being merely a parasitic company,has always survived thanks to host organisms, to which they could attach their tentacles and suck out juices. today, if chrysler becomes owned by cerberus, and chrysler doesn`t have any significant ties to any other host car manufacturer,how do they survive? what platforms they will use? they need a HOST MOTHERSHIP ( sounds like an aurora project, doesn`t it?).I think chrysler is doomed. And mitsubishi could hammer the final nail in this saga by refusing to give underpinnings. The king is naked! the king is naked!whop whop . you still `ve got the big whopper…..

  • avatar
    Economyst

    What I fail to understand is why DCX didnt simply split off Chrysler into a separate company not traded on the public markets instead of tying up a sale or non sale with Cerberus.

    The real issue in America today is that legislation, taxation and regulation has created such perverse incentives. For example state franchise laws creates unfair position for automakers to close and reduce their dealer network. That cerberus can conveniently file for bankruptcy and get around any major liabilities with no intention of running chrysler. The CAFE regulations create perverse incentives by the big three to produce small cars to meet their obligations.

  • avatar
    SherbornSean

    Wow,
    Posters at TTAC offer better insight on the Cerberus deal than 99% of news sources.

    What will happen when Fox gets hold of Dow Jones?

  • avatar

    From TTAC's Deep Throat: My12by60 is usually pretty good on his analysis but he's wrong on Chrysler. There would be no reason for Cerberus to bankrupt Chrysler unless it really starts to run out of cash. Cerberus has to put in large amount of cash at the start; even under bankruptcy, it would take a long time to break the contract (assuming both sides agree to a new contract in September). If the contract is terminated, the UAW will go on strike and then what? That's a very politically charged and costly scenario. Everyone (save Mr. Williams) seems to be missing Cerberus' real value in this deal: a healthy Chrysler dealer organization. It is in Cerberus interest to make sure those dealers have product to sell and stay in business. As Frank pointed out, who says that Chrysler has to manufacture the products they sell? The key: manage the business so that the vehicles Chrysler builds and sells are profitable and close or sell all the plants where they can't make money from building product. With a new retiree deal, those future costs will mostly be capped and will decline as retirees die off. I see the Chinese and Koreans playing a big role in the future of Chrysler's product line up. And perhaps, GM.

  • avatar
    jerry weber

    Bob, I beleive that cerebrus will not on purpose take chrysler down. However, remember last summer when the UAW said chrysler was too healthy to grant them the same health care concessions they gave to ford and gm. This was Daimler’s answer to that, then you will give those concessions to a new owner. As to why the UAW said they can live with this, what if Daimler told them stop this sale and all bets are off as to us closing divisions and selling off piecemeal, the rest of Chrysler. So here they get a chance to do pattern give backs with their expiring contracts with a still intact Chrysler. But don’t think the patience of the new guys will be equal to the old big three mentality of slow increases over the last 50 years now followed by slow give backs by the union. I think the UAW should have given DCX the medical givebacks last year, don’t you?

  • avatar

    I don;t know how many different ways I can say this: unions are not in the business of givign ANYTHING back.

    The so-called health care giveback to GM involved setting up a $3b union controlled fund and raising the deductible by a token amount (with subsidies for union members who couldn’t afford it).

    I agree with Frank and Deep Throat: Cerberus is bound and determined to make the UAW someone else’s problem.

    If Chrysler dealers can sell other manufacturers’ products, they can wean themselves off of UAW-produced goods. Same as now, perhaps, only more quickly.

  • avatar
    Economyst

    Cerberus operates like most Private Equity on a either a quick flip within a year or two but not remaining longer than 5 years. The last thing they want is to tie down their capital or distract their management time. Cereberus is primarily trading on the arbitrage difference between publicly quoted companies and their private value when they do not need to run to Wall Streets Drums.

  • avatar
    Gottleib

    Ha Ha Ha, does anyone else see the irony in all of this? Daimler aka Mercedes, marketed itself as being the best and most reliable maker of autos has just experienced what many of their customers in the US have with the purchase of a Mercedes. Purchased Chrysler for $37 billion, bragged about it and let everyone know what a good deal it was and then after a few issues they pull the plug and sell at $7billion getting rid of the lemon they overpaid for in the first place.
    I have know more than a few that have the same experience with one of Daimlers products. They bought a Mercedes for $35-55,000, bragged about what great cars they were and then after more than a few issues with reliability sold them for $7-10,000 and said never again. Somehow I can’t but help but see that what happened to Daimler has happened to many of their unsuspecting customers in this country over the past 20 years.

  • avatar
    Economyst

    The major benefit to Daimler is finally their management can start concentrating on their cars rather than building empires which they have failed to do so on more than one occasion in the past. The real story yet to unfold is whether now without Chrysler Daimler becomes a target of PE flush with cheap money. It could be ironic that as long as Daimler was with Chrysler it remained off the radar of PE companies but now as has been mentioned PE comps are renewed with more self confidence after major deals and want to strike whilst low interest rates prevail.

  • avatar
    HEATHROI

    the anthem of the old pre Tony Blair British Labour Party was called Jerusalem, a song about everyone banding together and finding the promised land at last.
    however those of a more cynical nature invented new lyrics which something like
    “Screw the working class,
    Now Ive got the bosses job at last”

    I wounder if Ron G has been made a offer he couldn’t refuse

  • avatar
    Lokkii

    I think that the Union President is making lemonaide. To express anger and surprise would simply make it more apparent that he was not included in the dealmaking.

    This goes over much better with your (union) voters… and gives you time to work out the best deal with the new bosses without having to fight your ‘supporters’ at the same time.

    Now let’s see if he can avoid the strike that Cerberus AND his union members are spoiling for.

    My bet is that he can’t.

  • avatar
    windswords

    I thought elected politicians were the best at bald faced lies, but this tops it:

    “We would like to thank DaimlerChrysler for their good stewardship of this American icon over the last decade,” Snow, Cerberus’ chairman said.

    http://www.freep.com/apps/pbcs.dll/article?AID=/20070514/BUSINESS01/70514009

  • avatar
    my12by60

    Deep Throat Says:

    >

    I will agree with this line of thinking once we see the timing at which Cerberus is required to inject its $6B of liquidity into Chrysler. If all the money is required to go in on the closing date, then I will lean toward what Deep Throat is outlining. If the money is primarily post-closing, then I see Cerberus using the threat of a filing or an actual filing to get what it needs from the UAW. Cerberus will get a DIP loan to fund negative cash flow during the BK period.

    >

    I disagree here. The dealer network is just a retail channel for Chrysler to distribute its cars. If the cars can’t be built and sold to the dealers for a profit by Chrysler, then the dealer network is not worth anything to Chrysler, which does not own the dealerships or participate in whatever profits the dealerships might be able to make. The country is over-saturated with dealerships for all domesitic products. Once Cerberus does what it needs to do at the manufacturing cost level and plant capacity level, then it needs just enough dealer relationships to properly distribute its vehicle output. If Chrysler has products that are in demand by the buying public, Chrysler will have no problem signing up as many dealers as it needs.

    >

    I agree with the goals that Cerberus likely has for Chrysler. Where Deep Throat and I differ is on whether the goals (plant closures, headcount reduction, retiree healthcare caps, work rule changes, wage cuts, etc.) can be achieved in a negotiated settlement or whether a strike and BK filing will be required for Cerberus to make the business work. If Delphi and the UAW can’t even work out a deal while Delphi (with Cerberus front and center in negotiations) is already in BK, why should we assume that Cerberus and the UAW will work out a new deal by September.

    Let’s keep our eyes open for how and when that Cerberus capital injection goes into Chrysler.

  • avatar
    jthorner

    I don’t see the value in the retail channel that some people think is there. With compelling product at the right price it is easy, and profitable, to sign up franchises. In fact, I would rather build a channel from scratch and get to pick and choose locations and operators instead of taking on the rag-tag team which supports any of the legacy auto makers.

  • avatar
    jerry weber

    Horner & 12×60 have it right about the dealer network of chrysler. It is too large much of it too weak and poorly located to sell large amounts of anything. A smaller trimmer network of larger dealers is the only solution for all the domestics. If chrysler is taken down because as Bob says the unions will not give back anything, than the dealer franchises will also go. To start clean on both the supply and distribution fronts with only those products that are viable will have to be the way of the future. The incremental way of ford, gm, and the old dcx will not be the way of the cebruses of the World.

  • avatar
    jdv

    “How long will GM management continue to take cash flow from the good businesses to fund the problems (mainly stemming from UAW wage and benefit packages and work rules) at GMNA? Until all GM liquidity is gone? Or does GM file GMNA if UAW negotiations fail to produce meaningful cuts later this year?”

    So many people on this site argue that the major issue for the US auto companies is the union liabilities. yes, that is a problem, but I’d argue a bigger problem is an uncompetitive product. Quality, features, price. And union concessions will only fix part of that.

    Lower the price of american cars by $1500 (or allow the automakers to make $1500 more per car, either way), and Toyota will still increase market share at their expense. The union is not the major problem, uncompetive product is….

  • avatar

    I think it needs saying again: Cerberus wouldn't have bought Chrysler if the UAW situation hadn't been sorted out. So all this media talk about them facing tough times around contract time is B.S. This is a done deal. The questions is, what did Cerberus give the UAW? Assuming that Magna gets Chrysler's manufacturing ops (hence the extra $1.7b from the Russians and other lined-up financing), how would Frank Stronach's mob placate the UAW? When Magna's Chrysler bid was in the making, Frank talked about "parternship with the UAW" and "profit sharing" and the like. Is the UAW about to get equity? Or would simple job guarantees (at the UAW's current rate of pay and benefits) be enough?

  • avatar
    jdv

    The union isn’t the main problem. Uncompetitive products are. The figure I read is that GM (and by extension the other US automakers) has $1500 higher costs per car produced. That cost has largely been absorbed by GM operating for a loss as they try to price their cars competively.

    Does anyone think that if Detroit lowered the cost of all their cars by $1500 that they STILL wouldn’t lose marketshare to the asian manufacturers? I think they still would, because the product needs to be better. And that problem has nothing to do with the union

  • avatar
    jolo

    “Is the UAW about to get equity? I can’t think of anything else that would bring them around so quickly.”

    The union doesn’t want equity, it would put them in the unfamiliar position of having to ride their members to work harder and smarter, which will make them look like management. The union leadership only wants to get their money from their members and eventually fade into the sunset, leaving behind their hand picked successors.

  • avatar
    starlightmica

    I think it needs saying again: Cerberus wouldn’t have bought Chrysler if the UAW situation hadn’t been sorted out.

    RF -

    So what did Cerberus not say to CAW’s Hargrove to keep him so ticked off?

  • avatar

    starlightmica:
    So what did Cerberus not say to CAW’s Hargrove to keep him so ticked off?

    They didn’t say anything to him. DCX and Cerberus cozied up to Gettelfinger and ignored Hargrove and the CAW, and he got his feelings hurt. He met with Cerberus today and they soothed his ruffled feathers and now he says everything is sunshine, lollypops, and rainbows.

  • avatar
    50merc

    mikey, I think you and your CAW brothers need some expert and candid legal advice. My guess is Canadian, not US, law will govern what GM/F/C can do about union contracts and pensions north of the border. Canadian law is probably more protective of labor (which admittedly can be a double-edged sword for companies in trouble). And I’ve heard there are advantages for US companies to build cars in Canada, so the outlook may be relatively brighter for you.

    Cutting the cost of health benefits of US retirees may be key to Cerebus’ plan. UAW retirees seem to have no idea how good they have it. My former employer provides health insurance through an agency that only seeks to break even. Coverage for a retiree and spouse who aren’t old enough for Medicare runs a thousand a month, 90% of that (plus deductibles and co-pays) paid by the former employee. There is no free lunch.

    A big existing dealer network can be an asset if good product can be provided. If you live in Hays, Kansas you’re two hours from the nearest Hyundai dealer, but you have your choice of Detroit wares. Converting Chrysler into essentially a finance and distribution operation, with limited or no inhouse manufacturing, may be the route to viability. Excess capacity is the curse of the industry. Magna might supply minivans and Ram pickups. Maybe Chrysler could buy facelifted (non-pneumatic) Town Cars and have a salable New Yorker. Lightly restyled Sonatas could become Sebrings and attract more buyers. And then there’s China et al.

  • avatar
    GMrefugee

    jdv,

    Imagine if you could put another $1500 into each product you made. Do you think you could afford a nicer interior? Softer materials? 6 speed transmission? High product cost, only a part of which is labor, is the original reason GM and others had cheapened their interiors, extended powertrain dev times, etc.

  • avatar
    hal

    Larding up on debt: Step One of the Private Equity M.O. http://www.ft.com/cms/s/4bcb2e0a-031b-11dc-a023-000b5df10621.html

    I don’t agree that Cerberus has necessarily made a deal with the UAW. I think it is enough for them to know they can negotiate from a position of strength.
    “Healthcare is one of the largest issues facing Chrysler, which has $17.5bn in almost totally unfunded liabilities. The UAW last year gave Ford and General Motors concessions on healthcare, but not Chrysler. Chrysler calculates that just by receiving those concessions it could save $3.5bn.”

    The union chiefs can’t do much now except welcome the deal. The negotiations come later.

  • avatar
    boredlawstudent

    GMrefugee said:
    Imagine if you could put another $1500 into each product you made. Do you think you could afford a nicer interior? Softer materials? 6 speed transmission? High product cost, only a part of which is labor, is the original reason GM and others had cheapened their interiors, extended powertrain dev times, etc.

    I just don’t buy that argument. If GM (or any big 2.333) cared about quality, wouldn’t they improve the car and just charge a bit more? Do you really believe that a Cobalt LT costing $16,400 (instead of $14.9K) including $1500 of “improvements” would be competitive with a Civic or even an Elantra for that matter? I doubt it.

    The hard truth is that GM can’t make quality cars. Throw all the money you want at them, but the fact remains that $100K still doesn’t get you a decent interior in the XLR-V.

    The product is the problem. Period. Had union costs been the real issue, GM cars wouldn’t be selling because they were overpriced, not because of poor quality.

  • avatar
    OverheadCam9000

    Cerberus is NOT going to hold Chrysler for five years. Not their M.O. Cerberus wanted, and got, the finance unit (where the money is). The manufacturing side is a money pit they will shake off faster than a dog shakes off water.

    Look for the Jeep brand to be sold to Honda (who needs some off-road cred) for what Cerberus paid DCX; purchase price of $7.4b. That will happen within 12 months. Just the brand, not the factories. The factories will be closed, one way or another.

    Next up, the Chrysler brand is sold to Chery Motors for, say, $5.0b. Cerberus has now broken even and the Chinese have their foot in the door.
    Again, the U.S. factories will be closed, one way or another.

    Finally, Dodge is dumped on Hyundai for $3.0b.
    Hyundai? Yes, Hyundai! (Remember that tag line?) Made money. All done in 24 months.

    Those moves should suck about 500k units of production out of NA, which is in the ballpark of excess capacity the industry gurus say we have.

  • avatar
    Luther

    Now that Chrysler is a private company, they won’t have to do the quarterly huckster-dance for the neurotic Wall Street twits. Lasorda will not have to worry about being buried alive in a cage for his CFO’s $5 accounting error as well. This is good news and I think Ford will eventually go private along with a lot of corporate America.

    GM, Ford, and Chrysler appear to be heading into some kind of limited consolidation. I can see 2.801 sharing powertrains and perhaps chassis where the sheetmetal, interior design, and suspension tuning will be unique corporate DNA. Ron and now Buzz are just too happy (at least not their usual grumpy selves) about this buyout so I think a 2.801 consolidation is in the works.

  • avatar
    jolo

    Now that Chrysler is a private company…

    They won’t be private for another 6 months. They have to play the union negotiations game and use the union’s steadfast stance against everything to partition up the company. They’ve got the money to get it through a bankruptcy and come out the other end as OverheadCam9000 is predicting.

  • avatar
    my12by60

    http://biz.yahoo.com/ap/070516/uaw_chrysler.html?.v=2

    If I were a Chrysler worker, I would not be feeling too comfy about my healthcare benefit. Article says pension is over-funded by $2B, but I would want to know on what basis (GAAP or economic basis?). And no indication from any of the sound-bites in this piece that any sort of health-care deal, wage or work-rule deal has been pre-arranged. Just assurance that headcount will not be cut. Of course, if only 70% of the existing workforce is willing to work for whatever deal Cerberus puts on the table, then Cerberus can claim that the headcount reduction was voluntary. I see zero evidence from this article that the UAW is happy about the Cerberus purchase of Chrysler.

  • avatar
    OverheadCam9000

    Speaking of “Now that Chrysler is a private company…”,
    it’s sort of ….. unusual….that a whole bunch of companies are suddenly being taken private. Chrysler, Baush & Lomb, Wall Street Journal, etc. According to Harold Maas /The Week/ “So far this year, 217 stocks have disappeared from U.S. markets as companies were snapped up by private equity firms or other corporations.”

    Could this be a reaction to Sarbanes/Oxley (SOX)regulations? Remember, the first CEO to sign a SOX certificate saying all was right with the company was…..
    J.T. Battenberg, III of Delphi!!!! Now, the Feds want to send him to prison for life for violating said SOX regulations.

    This, more than anything else, may drive Ford and GM to the arms of the Vulture Capitalists. Neither Billy Wagoner nor “Big Al” Mullaly would relish the idea of “20 years to life” because of an accounting error…..

  • avatar
    kjc117

    Dodge and Jeep are the only upside brands of the group.
    Chrysler is definately the turkey. I would sell it to the Chinese or Indians in a heartbeat.

  • avatar

    The challenges facing Chrysler extend far beyond (and deeper than) those issues the financial gurus at Cerberus could fix with any ‘strip and flip’ strategy: top-line sales. The branding problems in the automotive sector are the beast that haunts every mfg, and I have been wondering lately whether this buyout will be the prompt for one company (Chrysler) to really come to terms with it. Sponsoring a web page for a new vehicle on MySpace, or hosting a virtual showroom in Second Life is not going to rescue the business, in spite of how much glowing publicity the marketing media gives such shenanigans. I’m guardedly optimistic Cerberus will do something different and smarter here…


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