Chrysler Suicide Watch 9: Bad Carma?

When DaimlerChrysler unveiled Project X, the media was abuzz. Chrysler’s turnaround strategy included eliminating thousands of jobs, slashing vehicle production by a quarter and mothballing its Newark factory. More ominously, the plan pledged to consider “any option in order to find the best solution for both the Chrysler Group and DaimlerChrysler." To tell the truth, DaimlerChrysler’s “Recovery and Transformation” document should have stated the management’s desire to explore “any option to pump and dump Chrysler.” Those alternatives are gradually coming into focus. First, here’s what’s not going to happen…

DCX isn’t going to spin off the Chrysler Group. Dresdner Kleinwort Wasserstein analyst Arndt Ellinghorst estimates DCX would have to cough up $11b to cover Chrysler’s liabilities before flotation. After deducting health care liabilities, Morgan Stanley’s mavens value Chrysler’s automotive operations at around $9b, and their financial unit at $7.6b. Spending $11b to jettison a company with a net value of $16b doesn’t compute.

Plan A: sell Chrysler to a private equity group. To that end, Chrysler’s German overlords have commissioned J.P. Morgan to prepare a prospectus for an eventual auction. Fresh from cherry picking GM (i.e. buying 51% of their GMAC finance arm), our three-headed pals at Cerberus are in the hunt. Apollo Management, the Carlyle Group and the Blackstone Group are also reportedly interested.

If an investment group ends up owning Chrysler, it’s only a matter of time (a week?) before they break up the MoPar Pentastar and sell the pieces– from existing inventory to entire assembly lines. Chinese carmakers (who couldn’t afford to buy the company) would be lining up for the Mother of All Garage Sales.

Plan B: sell Chrysler to an automaker. According to press reports, Hyundai, Renault/Nissan, VW, FIAT, Mitsubishi and (for all we know) Nikolai Smolensky have all examined the possibility of buying the Chrysler Group and decided there are better– or at least slower– ways to kill themselves. There’s only one automaker brave stupid enough to take on Chrysler’s bloated dealer network, lackluster product portfolio, deeply entrenched union and enormous employee-related liabilities: GM.

Think about it: the above description applies equally to GM and Chrysler. A merger between the two floundering behemoths is about as sensible as two escaped convicts intertwining their leg irons so they can float downriver past their pursuers.

And yet, GM CFO Fritz Henderson is heading a team to contemplate the “synergy” this “merger of dunces” would create. It’s no secret (at least in these parts) that GM doesn’t have the cash to simply sign a check (and seal its doom). That leaves one possibility: an equity deal. And as ridiculous as THAT sounds, the arrangement would give DaimlerMinusChrysler around a 20% stake in GM.

DCX management could save face with stockholders without losing “real” money. Chrysler Group would be “saved” by GM. GM would gain segment-leading minivans and Jeeps. And more dealers than a crack convention. And enough terminally ill product lines to keep automotive historians busy for decades.

None of this bodes well for Chrysler. Or GM. Or Daimler.

Assuming Porsche buys VW, DaimlerWhatever will become Germany’s smallest stand-alone automaker. Analysts at Banca IMI hint that equity investors and financially flush hedge funds are already sniffing around. Talk about irony: fending off a hostile takeover was one of the major justifications for the DaimlerChrysler “merger of equals.” Without Chrysler, Daimler Benz is right back where they were in 1998.

If Daimler found itself on the receiving end of a hostile takeover, the irony could be compounded. Industry analysts see Daimler stripped into pieces, split into separate car, truck, and van businesses. Of course, this is all speculation. But six months ago, who would have thought Chrysler would be on the auction block?

Despite the enormous implications of any change of ownership at Chrysler on the United Auto Workers (UAW), the union remains uncharacteristically quiet on the subject. The obligatory UAW press release on Chrysler’s 13k job cuts payoffs reads like boilerplate: “Today’s action by DaimlerChrysler is devastating news for thousands of workers, their families and their communities.”

When asked about the possibility that GM could “buy” Chrysler, UAW president Ron Gettelfinger responded “I have absolutely no opinion on that at all.” This despite the fact that many of his members see Chrysler’s "alleged" sale as nothing more than a “threat” (i.e. a ploy to gain contract concessions). Gettelfinger, who sits on DCX’ Board of Supervisors, was equally nonplussed about a Chrysler auction. "It may end up that it's not sold. Who knows?"

Fair enough. With all these (and more) potential scenarios, no one can predict what will happen to the once-proud Chrysler Corporation. DCX better be checking their six, though. In their zeal to rid themselves of their American albatross, they may be setting themselves up for a fall. You know what they say about payback.