[vSzsgifP]

Business Week
May 14, 2007

Cerberus Nabs Chrysler

The private equity firm won the bidding for the troubled DaimlerChrysler division, but it has some tough slogging ahead

By David Welch

The troubled pair-up of Daimler and Chrysler is at long last coming to a close.

German automaker DaimlerChrysler (DCX) said today that it has reached an agreement to sell all but a 19.9% stake to private equity firm Cerberus Capital Management for $7.4 billion, ending a rocky eight-year tie-up between the two auto makers. "We're confident that we have come up with a solution that creates the best value for Daimler and the best opportunities for Chrysler," Daimler Chairman Dieter Zetsche said in a press conference.

For Daimler's part, the company reduced its exposure to troubled Chrysler, which lost $1.5 billion last year. Chrysler will assume all retiree obligations, including its overfunded pension plan and $18 billion in health-care liabilities. Zetsche said he expects the deal to be finalized in the third quarter.

The acquisition marks a new era for Chrysler, which will now be called Chrysler Holding LLC. The company will be privately held and largely controlled by Cerberus. The management team, including Chrysler Group CEO Thomas LaSorda, will remain in place.

Freedom from Quarterly Analyst Reports

Cerberus Chairman John W. Snow thinks that removing Chrysler from the public markets and pressure of quarterly earnings could help the carmaker restructure and get back on track. "Sometimes companies do better outside the requirements of quarterly analyst reports," Snow said. "We believe that's the case with Chrysler."

Snow says Cerberus wants to take a long-term approach to fixing the car business. Says Snow: "We want to take LaSorda and management and let them focus."

Chrysler has another advantage from the new deal. The company is being spun out from Daimler debt-free, Zetsche said in the press conference.
Of the $7.4 billion paid by Cerberus, Daimler will inject $5 billion into Chrysler Corp. LLC, the car business owned by Chrysler Holding, and another $1.05 billion into Chrysler Financial Services LLC, the auto lending arm. Adding up the costs to recapitalize Chrysler and fund certain obligations, Daimler will pay a net cash outflow of $650 million to unload Chrysler.

"Not a Benevolent Society"

Private equity control could make a big difference for a troubled U.S. auto industry as it heads into what many expect will be a landmark set of labor talks this summer.
Investors like Cerberus are known for buying troubled companies on the cheap, making swift changes, and taking them public or selling them once profitable. "This deal could pressure the UAW into doing something significant this summer," says David E. Cole, chairman of the Center for Automotive Research in Ann Arbor. "Private equity firms are not a benevolent society for the preservation of jobs."

Fixing Chrysler will necessitate more concessions from the union. For starters, new ownership will want the same concessions on health-care benefits that the UAW already gave to General Motors (GM) and Ford Motor (F).

More job cuts may be coming, too. Chrysler said in February that it will eliminate 13,000 jobs as it attempts to get back to profitability. The company says that cutting those jobs and closing one plant will be enough. But sales are down through April of this year versus last year for Chrysler—despite high sales incentives and big sales to rental fleets.

Getting concessions could be tough for Cerberus, though. Cerberus was also part of a bid for bankrupt parts maker Delphi (DPHIQ), but the deal is crumbling since the two sides cannot seem to come to a new agreement on wages and benefits for union workers.

Union Endorsement, But…

However, the UAW endorsed the deal. UAW President Ronald Gettelfinger said in a statement that he had an in-depth meeting with Zetsche and Chrysler Group CEO LaSorda, in Stuttgart. The two union officers also met with LaSorda and John Franciosi, Senior Vice President of Employee Relations for the Chrysler Group "for additional clarification on issues impacting our membership," Gettelfinger said.

After those meetings, Gettelfinger said that he thinks the deal is in the best interest of Chrysler's 50,000 UAW members. Says Cerberus Chairman Snow: "We have received a response from Mr. Gettelfinger that is so positive."

Even with Gettelfinger's endorsement, however, this summer's talks will be tough for everyone involved. All three U.S. carmakers face huge health-care liabilities and suffer a big cost disadvantage when compared with Japanese and Korean rivals.

Cerberus has, as an advisor, former Chrysler Group COO Wolfgang Bernhard. His presence and close relationship to Daimler Chairman Dieter Zetsche likely strengthened Cerberus's bid.

Other Bidders

Daimler had been considering two other bidders: a team of private equity firms Blackstone Group and Centerbridge Capital Partners, and a bid led by parts maker Magna Intl (MGA).

One source says Magna thought it was close to a deal last week. In recent weeks, many news reports have put Magna as having the inside track on a deal for Chrysler. Magna even had talks with two different private equity firms, including privatecompany name="Ripplewood Holdings" id="22717"/> before finding another investor, Canada-based Onex Partners, to join its bid.

But Zetsche said Cerberus was the best choice.

With Cerberus now in control, Chrysler will be a test case for whether new ownership and direction, coming from outside the hidebound ways of Detroit, can do any better at fixing Motown's intractable problems.

David Welch is BusinessWeek's Detroit bureau chief.

http://www.businessweek.com/autos/co...514_936288.htm

[robinthesearchmasterh]

Cerberus May Bring Trouble for UAW

By THE ASSOCIATED PRESS
Published: May 18, 2007

Filed at 5:49 p.m. ET

DETROIT (AP) -- With Detroit automakers losing billions and their market share in a slump, this summer's contract talks with the United Auto Workers promised to be more contentious than ever.

But Monday's announcement that Daimler would sell most of Chrysler to private equity firm Cerberus Capital Management LP likely means the union will face even deeper demands for givebacks as the automakers try to pare costs to compete with Honda and Toyota.

Cerberus is seen wielding a big bat when it comes to the bargaining. Because it bought Chrysler for relatively little, it can threaten to sell the company off in pieces or take it into bankruptcy. It also will be looking for a quick return on its $7.4 billion investment for an 80.1 percent stake in Chrysler, many analysts said.

''What Cerberus does is bring to the forefront the real possibility, if the union doesn't agree to real major changes in the legacy costs, they would face bankruptcy rather than just an incremental adjustment'' in wages or benefits, said Harry Katz, dean of the Cornell University School of Industrial and Labor Relations who has studied the auto industry for 25 years. ''It brings home kind of the atom bomb scare.''

The mystery of Cerberus was on the minds of many Chrysler hourly workers this week after the sale was announced, with fears that wages as well as pension and health care benefits could be cut. And worries about an industry outsider running an auto company have made their way onto the floors at other automakers' plants.

''I know I'm nervous about it,'' said Chuck Rogers, president of the UAW local at a General Motors Corp. transmission plant in Ypsilanti with more than 2,000 workers. ''I'm getting to the point where I'm ready to retire. I'm afraid if an outside company takes over, the UAW won't have any control over it.''

Chief among demands from the Detroit Three will be reduction or elimination of their long-term liabilities for retiree health care, which together total about $100 billion, said David Cole, chairman of the Center for Automotive Research in Ann Arbor.

With a declining U.S. market stifling top-line growth, the only option to return Chrysler to profitability is to cut costs, especially the estimated $19 billion retiree health care obligation, according to analysts.

Cerberus has a lot of leverage in the talks, analysts say, because it can threaten to dismember Chrysler or take it into bankruptcy protection, leaving workers with no health insurance and uncertain pensions.

Yet Cerberus Chairman John Snow, a former U.S. Treasury Secretary, said the workers' fears are unfounded. He said that Cerberus is different from other private equity firms because it holds companies much longer to turn them around.

In an interview with The Associated Press, he said the characterization of Cerberus as a corporate raider that will split up a company to make money is contrary to Cerberus' history.

''We never invest in a company with any plan other than what can be done to enhance the company's competitiveness and enhance its performance,'' he said. ''We invest in undervalued companies where there are good management strategies, where there's a committed work force and good management teams.''

Cerberus, he said, has no exit strategy for Chrysler and has faith in its management's turnaround plan. The firm, he said, will hold companies indefinitely.

''We buy with the clear intention to help turn the company around, help it achieve its potential,'' he said.

Cerberus bought Vanguard Car Rental, which operates the Alamo and National Brands, out of bankruptcy in 2003, and was criticized for swiftly moving the corporate headquarters and cutting hundreds of jobs. It wasn't long after the 2004 acquisition of the Mervyn's department store chain that Cerberus shuttered 80 stores and exited two of its biggest markets.

But Snow said Cerberus works well with organized labor, pointing to his relationship with unions while chairman and chief executive officer of railroad operator CSX Corp.

James Brunkenhoefer, national legislative director for the United Transportation Union, CSX's largest labor group, said CSX dealt with labor fairly under Snow, treating the union as an equal partner in solving problems.

''We had the best relationship with CSX under his tenure than we have had at any of the major railroads in the 25 years that I've been full-time with the union,'' Brunkenhoefer said. ''It definitely deteriorated after he left.''

The union didn't give up or gain anything major while Snow was its leader, Brunkenhoefer said.

Snow also points out that Chrysler management, not Cerberus, will bargain with the UAW. Brunkenhoefer said Snow didn't do the bargaining for CSX, either, but did set the tone for management.

Regardless of who is at the table, they'll have to deal with the retiree health care costs or the U.S.-based auto industry will collapse, says Cole.

''Companies can't survive with that obligation, spotting competitors a couple of thousand dollars on every product,'' Cole said.

Wages and benefits, which for the Detroit automakers are about $25 per hour more than Honda Motor Co. and Toyota Motor Corp. pay at their U.S. plants, are secondary to the long-term health care liability, according to Cole.

''A $100 billion liability in a hugely competitive market is unbelievable,'' Cole said. ''Unless there's a huge attack on that by both labor and management, these companies are not survivable over the longer term.''

Former Chrysler Chairman Lee Iacocca agrees that the legacy costs are the problem that must be dealt with. But in an essay written for Business Week, he said that problem existed long before Cerberus entered the business. It would be naive to think that a struggling company won't have to make cuts, he wrote.

''With new contract negotiations set to begin this summer, many workers fear they'll be forced to make huge concessions,'' Iacocca wrote. ''But that fear existed before the sale. If Cerberus is serious about reviving Chrysler, it will have to take care of the employees who build the cars and the dealers who sell and service them.''

To resolve the health care liability, the Detroit Three are talking about jointly putting money into a giant trust and letting the union run its health care operation, similar to a solution worked out between the Goodyear Tire & Rubber Co. and the United Steelworkers.

Still, any such change will be a difficult sell for workers.

Rogers, the Ypsilanti local president, said workers know the realities yet struggle with givebacks because executives are paid millions. GM Chairman Rick Wagoner received compensation that the company valued at $9.57 million during 2006.

''We don't want GM to go under because it hurts everybody,'' Rogers said. ''We have to be realistic, but the corporation should be realistic in the wages that they are making and paying each other.''

^--------

AP Business Writer Joe Bel Bruno in New York contributed to this report.

Copyright 2007 The New York Times Company

[Fetowip]

It must be an exciting time to be in private equity.

[Katoabralia]

Chrysler was big-time hot in the early 90s. Dodge Ram. Intrepid. Viper. Neon. Cirrus. A great lineup of terrific, stylish vehicles. Then...what the heck happened? Suddenly the amazing Chrysler stylists went...where? You can't tell me the whizkids who dreamed up the Chrysler Atlantic, Prowler, and Intrepid ESX just left the company! If in fact they did, I don't see their handiwork anywhere else. Big mystery.

[VomsVomaMew]

What happened to Chrysler stylists??

Maybe Chrysler's former president brought along a small "entourage" when he began working at GM.

[Ekzamenov]

I found an answer to the Chrysler mystery. Iacocca named Eaton to be his successor. Eaton tubed the company, allowing Daimler Benz to take over. The Chrysler whizkids, including lead designer Tom Gale, left the company. The result is what we have today.

In the good news department, the marriage with Daimler was a failure, the company will be on its own again, and Eaton is long gone. Chrysler could stage a brilliant comeback, with smart management and a return of its styling geniuses. The sooner the new Dodge Challenger hits the showroom, the better...I'm already putting aside $$$ for a down payment on it!

[+++Poguru+++]

I found an answer to the Chrysler mystery. Iacocca named Eaton to be his successor. Eaton tubed the company, allowing Daimler Benz to take over.

When I read profiles of Eaton, I get something more like this:
Following Lee Iacocca as head of Chrysler, Eaton led the company to a banner year in 1994 with earnings of $3.7 billion and sales of $52.2 billion, both far above previous records. In 1996, Eaton's Chrysler led auto makers in profits thanks to its newly innovative and highly successful truck line. Eaton headed Chrysler during its 1998 merger with Daimler-Benz. http://www.hbs.edu/leadership/database/leaders/243/

What's the dope with this dude?

[Jerwittdergut]

Iacocca spells a different line on Eaton. It would be nice to get the straight scoop. Eaton was supposed to be a "car guy" but he sold out to Daimler. Go figure.

[johnstylet]

Maybe Eaton was secretly more of a "shine-on-short-term-profits guy" than a "car guy."