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Chrysler sold in unprecedented auto deal

By James R. Healey, Sharon Silke Carty, Chris Woodyard and Matt Krantz, USA TODAY

German automaker DaimlerChrysler (DCX), after paying $36 billion for Chrysler in 1998, now is essentially paying a private investment company to take money-losing Chrysler off its hands.

It’s a stunning reversal, just one of several stunners in a deal unprecedented in the modern auto industry.

The sale of Chrysler to Cerberus Capital Management, announced Monday, would result in the first private ownership of a major U.S. auto company since Ford Motor went public in 1956. It marks the first time the United Auto Workers union has signaled its willingness to compromise on previously non-negotiable issues. It’s a bet by a shrewd investment company on what has appeared to be a lame U.S. industry beset by high costs and better, lower-cost competitors.

And it is the chance of a lifetime for a car company to reinvent itself, to out-Toyota Toyota in lean manufacturing and vehicle quality.

“It doesn’t matter who owns it,” says Jack Fitzgerald, a Chrysler dealer since 1966. “It’s what they do with it. I would like to see them copy Toyota” so dealers would have better-quality vehicles that are easy to sell and buyers would develop the kind of loyalty that eventually makes them willing to pay more.

“It’s all about product,” says Fitzgerald, who sells Chrysler’s namesake brand as well as the company’s Dodge and Jeep brands at Fitzgerald Auto Malls in Maryland, Pennsylvania and Florida.

Cerberus, which invests in troubled companies it thinks are undervalued and ripe for turnaround, won’t specify how it would overhaul Chrysler after the deal closes in the third quarter. Nor does it appear eager to micromanage the automaker, despite recent losses and lukewarm products.

“Our plan really is to provide patient capital,” says Cerberus spokesman Peter Duda; to “free management from quarter-to-quarter results and allow them to focus on a long-term recovery and transformation plan.”

Cerberus, founded in 1992, is based in New York and is run by financier Stephen Feinberg. John Snow, Treasury secretary from 2003 to last June and former head of railroad CSX, was appointed chairman of Cerberus in October. Former vice president Dan Quayle is a director.

The company says it manages some $25 billion in assets and owns about 50 companies with combined annual revenue of more than $60 billion.

DaimlerChrysler had been romancing buyers for Chrysler since announcing financial results Feb. 14, a companywide profit of $4.3 billion despite a $1.5 operating loss by Chrysler. As many as five bidders were reported to be interested.

Best bet for Daimler

Cerberus’ winning bid is, rather than the highest price, more like the proposal that will cost Daimler the least. “DaimlerChrysler is paying Cerberus to take Chrysler off its hands,” says David Healy, auto analyst at Burnham Securities.

Highlights announced by the companies Monday:

  • Cerberus puts up $7.4 billion to get 80.1% of Chrysler. But most of that goes into Chrysler and Chrysler financial. Daimler gets just $1.35 billion.

Cerberus-owned Chrysler still would be responsible for pension and health care liabilities, but the pension plan is $2 billion overfunded, by Daimler’s reckoning, minimizing some of that concern.

  • Daimler lends $400 million of the $1.35 billion to Chrysler; spends $1.6 billion on the costs of a Chrysler restructuring plan announced Feb. 14; buys back all of Chrysler’s bonds to leave it debt-free, paying a forecast $878 million in prepayment penalties for retiring some bonds early.

Daimler CEO Dieter Zetsche said the all-in cost to dump 80.1% of Chrysler is $500 million.

  • Daimler books other costs and write-downs, forecast at $4.1 billion to $5.4 billion, more than it made last year, against this year’s earnings. Daimler will provide 2007 earnings guidance today.

“It’s an embarrassment, but it’s getting rid of something that wasn’t producing. You can keep on bleeding, or bite the bullet and say it’s not working,” says Anand Sharma, CEO of TBM Consulting. TBM markets itself as an expert in teaching how to implement Toyota’s high-quality, lean-manufacturing principles.

TBM worked with Chrysler in 1995-98, the years leading up to the acquisition by what was then Daimler-Benz. “Middle management was bloated and overpaid, and they didn’t want to do anything about it; people had retired and didn’t tell anybody. That’s why we walked away” from the Chrysler job, Sharma says.

What Cerberus should do

That’s the first thing Cerberus-owned Chrysler must do, he says: Have the guts to ax anybody more interested in turf that success.

That, he says, will take new management, even though Cerberus says it will leave CEO Tom LaSorda in place. “The first announcement always says you’ll keep it the same, but that never happens.”

Cerberus has auto veterans at hand. Former Chrysler COO Wolfgang Bernhard recently joined Cerberus as a senior executive. David Thursfield, who ran Ford Motor’s operations outside of North and South America, joined Cerberus in April 2004 as a senior member of its automotive team.

Cerberus said Monday that Bernhard would not be involved in Chrysler operations. It wouldn’t comment on any role for Thursfield.

Burnham’s Healy can’t imagine Bernhard on the sidelines. “He’s largely responsible for the fact that Chrysler did better than Ford or GM in the early part (of the merger period). He was responsible for the Chrysler 300,” a profitable sedan, “and he’s very aggressive. He could get a non-operational assignment – board member, for instance – and influence affairs that way.”

What else the industry veterans and observers say Chrysler must do to survive and thrive:

  • Get tough with the union. That’s where private ownership can make all the difference.

“Shareholders are much more apt to see a strike solely as a negative” while a private owner with deep pockets “has a little stronger stomach in dealing with a strike,” says Kevin Tynan, auto industry analyst at Argus Research.

Private companies “are in business for one objective, to do whatever it takes to make the company successful and profitable,” says David Cole of the Center for Automotive Research. “Not having public shareholders gives them more power, and part of that is the fear they bring to the game.”

The UAW had been lobbying hard for Daimler to keep Chrysler. But when the sale was announced Monday, UAW President Ron Gettelfinger called it “in the best interests of our UAW members.”

“We didn’t get a choice in the selection,” Gettelfinger said at a press conference. “We pushed very hard to stay in the Daimler family. It’s not going to happen.”

Daimler flew Gettelfinger and General Holiefield, UAW vice president in charge of DaimlerChrysler, to Stuttgart, Germany, for a meeting Saturday with Zetsche and LaSorda. That’s when they laid out the deal with Cerberus for Gettelfinger, who is a member of DaimlerChrysler’s supervisory board.

The union decided to support the plan after it saw that Cerberus had promised to pour $1.7 billion into research and development at Chrysler. “Our goal, our objective, is to strengthen the Chrysler Group and maintain job security for our membership,” Gettelfinger said.

Gettelfinger and Holiefield plan to meet with Chrysler executives and Cerberus’ Feinberg, among others, early today. Gettelfinger hopes to hear “a reaffirmation” of the promises made Saturday.

  • Dump dealers. The fewer there are, the more profitable each one can be. One dealer can own several stores, if need be, to ensure the company’s presence in key markets. When there are too many dealers, they compete against one another instead of against ford and Honda and Hyundai.

Chrysler reported 3,698 U.S. dealers at the end of April. LaSorda said in February he would cut 10% to 15%, but gave no hard target or deadline. “You have to look at a reduced dealer network, and reinvest in your strongest dealers,” says Mike Jackson, CEO of dealership chain AutoNation.

  • Leverage connections. Cerberus previously bought 51% of GMAC, once the captive finance unit of General Motors.

Part of the fix-it plan is expected to involve cost savings by merging some operations of GMAC and Chrysler Financial, says Roger Aguinaldo, CEO at M&A Advisor newsletter. Cerberus “can make this thing work,” he says.

Cerberus also has learned some automotive ins and outs while bidding for auto suppliers Delphi and Tower.

And though it appears to be getting a good deal, the fact that Cerberus would agree to buy Chrysler “with its current pension/health care liabilities but without an apparent new labor contract in place” is “a positive sign for the Big Three’s labor restructuring efforts,” notes JPMorgan Securities analyst Himanshu Patel in a note to clients.

  • Focus the product line. Echoing remarks of analysts and consultants, Healy says: “I don’t think (Chrysler) can afford to cover the whole spectrum from big SUVs to compact cars with the volume they have in the U.S. they have to find some way to be a niche player where the profits are.”

Can it be done?

Yes, say most observers, including Paul Schaye of Chestnut Hill Partners. Chrysler under Cerberus will have the independence to close plants, eliminate unprofitable operations and take other steps difficult or impossible as a public company. But, “This is easily a two-year work in process,” Schaye says. Others foresee a three- to five-year turnaround. All figure Cerberus will take Chrysler public again once it’s repaired.

Healy says it could take longer than expected and cost Cerberus more than $7.4 billion, because “the company’s in chaos.

“All I know is that I’m glad I don’t have this thing dumped in my lap.”