[Cue organ music] Welcome to this week’s installment of “That’s the Way the Daimler Benz!” When we last we left our hapless heroine, little Chrissie Chrysler, the not-so-sprightly maiden was tied to the railroad tracks. The fiendish Dr Z stood nearby, twirling his mustache, laughing maniacally as he mentally explored the options for disposing of Chrissie’s family farm. Will this be the end of our plucky paladin? Or will a courageous cowboy arrive to save Chrissie in the nick of time? Join us as we anxiously await little Chrissie’s final fate. [Fade organ music]
The latest episode of the Chrysler “restructuring” melodrama brings us news that Canada’s Magna Corporation and “a private equity partner” have made a $4.6b offer to buy Chrysler from DaimlerChrysler. Magna’s equity partner remains under wraps, but every indication (i.e. common sense) points to The Blackstone Group LP.
On Thursday, this enormous private equity firm announced an IPO aimed at raising up to $4b. Blackstone is one of three major equity firms (including Cerberus Capital Management and Centerbridge Partners) that’s expressed interest in buying the Chrysler Group from its German owners.
The “who” of this first offer may remain [slightly] mysterious, but the timing of the play wasn’t. Earlier this week Chrysler General Manager Tom LaSorda told a gathering of Chrysler dealers that an announcement about his employer’s future would be made “soon.” At the same time, Tommy Boy sent an email to every Chrysler employee urging them to “focus on the urgent job at hand–to develop, build and sell great products and establish the foundation for a long and prosperous future.”
Industry analysts and traders knew something was afoot. DCX stock had risen as much as six percent on speculation that a deal is pending. As Howard Wheeldon, the automaker specialist at BCG Partners in London stated, "I would suggest there is some form of approach that has been made for Chrysler that is springing the shares to life." Well duh.
Ah, but will DaimlerChrysler go through with a sale? Some analysts have suggested the DCX is dangling Chrysler like so much bait to drive their stock up and bully the United Auto Workers into some major concessions. Others just want them to hurry up and get on with it.
Argus Research Corp. auto analyst Kevin Tynan states "I don't think Daimler-Benz is looking to dump Chrysler on the first company that waves a buck at them. But I think it would be in their best interest to let it go."
According to Citigroup analyst Jon Rogers, a private equity company is the most logical buyer. But Rogers isn’t ready to rule out General Motors. Like former GM board member Jerry York, Rogers thinks the UAW is the linchpin. The union would be more open to offering concessions to GM than a financial buyer flush with cash.
Even though GM has publicly stated they’re not interested in owning Chrysler, Rogers reports GM could easily borrow up to $18b toward restructuring Chrysler. A zero equity transfer to GM would create $9 billion in value– and the mother of all Detroit Death Watches.
Whoever ends up with Chrysler faces not one but two 900 pound gorillas in the proverbial room: the UAW and legacy costs. Back to former Chrysler CFO and ex-GM’er Jerry York: “I wouldn't even think about [buying Chrysler] unless I could form a true partnering relationship with the UAW.”
Partner schmartner. UAW President Ron Gettelfinger has stated his union’s first priority in all of this Chrysler kerfuffle: stopping any sale. Although Big Ron says priorities two and three are encouraging a sale to an existing automaker or an equity firm, Chrysler’s new owner or owners will have to deal with the aftermath of what the unions would view as a hostile takeover.
Without concessions, the new boss’ revitalization plans would be stymied by Chrysler’s staggering pensions and healthcare costs. Goldman Sachs estimates that Chrysler’s next gen masters would inherit $16.5b in pension and healthcare liabilities.
In fact, DCX may not be looking to benefit from the sale of Chrysler– other than divesting themselves of these obligations. University of Maryland business professor Peter Morici can’t see anyone paying much for Chrysler. "The reality is that unless there are structural changes in the labor agreement, Chrysler Corp. is worth less than zero."
[Cue organ music] What does all this mean for our luckless lass, little Chrissie Chrysler? Sadly, she remains lashed to the railroad tracks, contemplating her fate. It seems that the rescuing cowboys are busy drawing straws, trying to decide who should have the honor of rescuing her from the evil Dr. Z., or whether if it’s even worth the effort. Join us again next week and watch one of her well-heeled saviors swing into action– or not! [Swell organ music then fade]
Unlike the movies, the poor thing is going to get rained on, starved or run over….then the hero will swing into action and deal with what’s left.
And it will be as messy as you’d imagine.
Why doesn’t the UAW buy Chrysler? Chrysler is in trouble because of poor management right? Surely all the geniuses in the union can solve these problems, return Chrysler to profitability, pay themselves huge bonuses, and retire at 35.
“The reality is that unless there are structural changes in the labor agreement, Chrysler Corp. is worth less than zero.”
There will be changes, the question is will there be enough change to make a difference.
The not so powerfull UAW/CAW is a symptom of the big 2.5 illness.If the unions could cure Detroit of its problems by just taking a few MORE
concessions,it would be done by now.
The legacy costs are a fact for sure, but the problems/rot run a lot deeper.
I’ve read today on detnews.com that Magna is looking to gain a 20-25% stake in Chrysler with their offer.
That indicates that DCX isn’t looking to get rid of Chrysler once and for all.
I think it is very possible for Daimler and Chrysler to split up with Daimler still keeping a majority in Chrysler. This would also put pressure on the UAW, because a legally seperated Chrysler would unveil all the financial troubles the ‘merican half of DCX really is in.
Why would Gettelfinger have any say in the matter when he/UAW have a zero ownership stake in Chrysler? How many company shares does UAW own? Do they own a controlling interest? …Oh…Wait….
Why doesn’t Gettelfinger come up with a business plan and start schlepping it to Investors to raise money to buy Chrysler? You know…Like an entrepreneur would do …Oh…Wait…..
Gettelfinger/UAW have some freakin nerve to talk about “hostile takeover” …Oh…Wait…..
What a freakin joke…Embarassing actually to let a bunch of childish thugs/bullies with no ownership stake dictate owner’s prerogatives… This must be Amerika… I have an overwhelming desire to go into book stores and move Orwell’s “1984” to the non-fiction section. Poor Chrissie just seems to be getting raped a lot. She should learn self-defense.
The union has some nerve talking about hostility. I agree. Maybe the UAW should put up some cash and buy a stake in the mess they helped make. at least then they would get an understanding about how hard they are to work with.
Sounds to me that the Germans are dangling the Chrysler meat in front of the beast to see if anyone is willing to pay anything near to what cash they burned to acquire the pig. In fact, if things leep getting worse for the big 0.5, we could all throw a couple of bucks into the hat and buy it outright. I’d rather just have the hat. Who in their right mind would want to buy into that mess ?
Luther: “Why would Gettelfinger have any say in the matter when he/UAW have a zero ownership stake in Chrysler?”
Well, he’s on DCX’ supervisory board. According to German law the workers get half the supervisory board minus one. Another reason for Daimler and Chrysler to split up…
I shall repeat myself. DCX cannot sell Chrysler until they file an 11 and dump the Union contract and “legacy costs”.
What about a combo of these events? Chrysler gets a legal separation, promptly files chap 11, ditches UAW obligations, comes out of bankruptcy, and Daimler sells, (or not.) Could the UAW prevent such a timeline?
GM won’t buy Chrysler, they’re already $300 billion in debt, or so I heard, buying Chrysler would be quite possibly the worst decision for them right now. They’re acting like they might buy Chrysler to make it seem like GM is still powerful, when really it’s a dying company.
Magna makes auto parts for all of the big 2.5. If they get into bed with DCX, will they still be making parts for the others?
Magna stock once hit $2, it seems as though delusions of grandeur may bring on another bout of ostrichism.
Chapter 11 for a car maker is the surest way to chapter 7.
If I know anything as an informed customer is that, however much cash on the hood of the car, any rumour about bankruptcy is enough to chase me off the lot.
Officialize it with chapter 11 and see the union revolt, strike, and snowball all the strugling 2nd and 3rd tier suppliers.
See any potential customer run away from the dealers as if their hair was on fire.
Can’t sell cars, can’t build cars. What’s to do? Chapter 7 that’s what.
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I sure would like to see GM buy Chrysler. That’s just what GM needs. More dealers, more brands, more unions, more cars that sell for less than they cost to make, more leacy cost.
It looks like a winner!
Hmm .. Magna has made an offer. I suppose we underestimated Stronach’s desire to design and build cars…
“A zero equity transfer to GM would create $9 billion in value– and the mother of all Detroit Death Watches.”
Now *that* is having a sense of humour about this!
I can’t wait to see how this plays out… ironically the latest Deatchwatch may be the first casualty (I believe being sold to private equity or being absorbed by the competition qualifies as drastic life-altering change for Chrysler).
Thomas: Well, he’s on DCX’ supervisory board. According to German law the workers get half the supervisory board minus one. Another reason for Daimler and Chrysler to split up…
There you pin-pointed it. I dont blame Gettelfinger/UAW for this since they are just acting in accordance with a Government’s “law”. The “law” is the ultimate cause of these problems not Labor Unions per se. It is the Gimme-Gimme-Gimme Voters and their agents of “legalized theft” (aka Politicians) that are at the root of the problems…The minority is enslaved (property rights violated) because they are simply out-voted by the majority. (Democracy is nothing more than gang/tribal warfare using Gov’t “laws” instead of exposed guns. A “law” is just a concealed weapon)
tms1999: Chapter 11 for a car maker is the surest way to chapter 7.
I tend to agree… Unless Chrysler can affectively prey upon peoples [misguided] sense of sympathy/guilt/fear/patriotism…..
‘UAW President Ron Gettelfinger has stated his union’s first priority in all of this Chrysler kerfuffle: stopping any sale.’
Man, and I thought his ilk were a thing of the past. Go ahead and make a ‘brave’ stand. Will you be puffing out your chest when your retirees don’t have a pot to piss in?
There was a time when Chrysler was known for engineering that would’ve rivaled its (now) parent company: two generations of Hemi-head V8s, torsion bar front suspensions, a “Slant-Six” engine that could get 25 mpg and go 200,000 miles without a cylinder head rebuild, and even experimental turbine cars.
That may be part of the reason that Plymouth ‘cudas with Hemi-head engines bring up to $2 million at some auctions.
If Chrysler can’t re-establish itself with the 2009 Dodge Challenger, the unions are going to have to look at making as many concessions as they can; either that, or there won’t be a Chrysler.
I think the real question is if Chrysler gets bought by a private equity group, does that end it’s Suicide Watch? Does that mean they win the game, since they finished first? (I’m only half joking… my assumption is that a privately owned Chrysler would be better off than Chrysler is in it’s current state).
Also, again for the B-School kids… Are there similar cases of this happened in heavy manufacturing? I think people often refer to Bethlehem Steel? Same thing happened? Do they make a ‘History of heavy industry & manufacturing for Dummies’ That I ought to read?
I think the real question is if Chrysler gets bought by a private equity group, does that end it’s Suicide Watch?
That would depend on what the equity group did with Chrysler. If they dismantled it and sold off the various divisions, then I’d say that was the end of Chrysler as we know it, and thus, the end of the Suicide Watch. However, if they actually tried making a go at reviving Chrysler and operating it as a leaner, meaner independent automaker, we’d probably have to put it in the ICU, monitor its progress closely and see if it’s bent on pulling out the IVs and turning off the respirator or if it will struggle to live.
And the plot thickens. From this morning’s Detroit News:
General Motors Corp. has a bid on the table for the Chrysler Group and remains a long-shot candidate to acquire the struggling U.S. division of DaimlerChrysler AG, The Detroit News has learned.
While GM’s offer, made in late January, was initially rejected by DaimlerChrysler, the bid is still active as other potential buyers gear up to make their own proposals this week.
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To acquire Chrysler, GM offered to give DaimlerChrysler a minority stake in GM stock of less than 10 percent.
In addition, the proposal called for DaimlerChrysler to pay GM more than $1 billion to defray Chrysler’s health care costs, and then team up with GM to seek financial concessions for Chrysler from the United Auto Workers.
The GM proposal was rejected as too low by DaimlerChrysler, according to people close to the talks.
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But even with Magna and private-equity players in the bidding, GM could still prove a force to be reckoned with.
The key to all this is Jeep. As the only nameplate within Chrysler with any brand equity, and at least two vehicles that make a profit (Grand Cherokee and Wrangler), Jeep holds the key to the future.
If DCX sells Chrysler and holds on to Jeep, then Magna and Blackstone have no cash cows and will have to break up the company and sell the parts. If Magna gets Jeep, look for them to sell it to generate cash in the short run and buy themselves the time to restructure Chrysler.
It could be that GM is really looking to set themselves up to buy Jeep, if for no other reason than to keep Ford from buying it. Ford just got a cool $900MM for Aston, and that cash could buy Jeep.
If I could walk away with any of the Chrysler brands, Jeep would be the one.
Frank Williams:
February 28th, 2007 at 10:29 am
“Kurt B: No comment on the Magna rumours?”
According to the experts at Citigroup, Magna is committed to maintaining a debt-free balance sheet. While they certainly have the cash flow necessary to float a deal like this, they most likely wouldn’t want to acquire Chrysler as a whole because of the debt they’d encumber. They’re most likely interested in parts of Chrysler (electronics, engine production, stamping facilites) they could leverage to expand their parts empire.
Legacy costs? Health care costs? Concessions by the UAW to simply put the union rank and file on the same benefit plan as the salaried ranks (with co-pays and deductibles) would save billions. The backlash would be unbelievable, but long term gains would be huge.
From SuperAROD’s post above: “According to the experts at Citigroup, Magna is committed to maintaining a debt-free balance sheet.”
Which is probably why they’re going into this with a yet-to-be-identified private equity partner that is flush with cash. And “parting out” Chrysler like an old Cordoba bound for the junkyard is still a viable way for whoever ends up with it to recoup the investment.
Zarba,
Great point. If DCX wants to maximize its value, I’d propose they package Jeep separately for sale. This would make it quite attractive to an automaker who could capitalize on its brand on a global basis. Renault/Nissan and Porsche/VW come to mind.
What to do with the rest? Well, rely on partners for platform engineering:
– Mitsubishi for compacts and small trucks
– Chery for small cars
– old Benz platforms for mid/large cars
– GM for large pickups and SUVs.
– retain the DCX minivan platform engineers
Then shrink the manufacturing capacity in the US over time as you shrink the workforce until you are at a sustainable and profitable 7-8% of the market. Five years of breakeven results, and then profitable.
Magna is only looking for a 25% equity. Is there any point where the parts of Chrysler if sold separately will gain you a profit? I me physical assets not the individual brands. Chrysler doesn’t make anything really worth buying. Jeep has some good models and Dodge has a few as well (viper, caliber, charger…)
Unless you can dump the union contracts and reach a settlement on healthcare and pension costs who would want to buy it?
Private equity investments are always intended to be short term deals where cash is extracted from companies and they the companies are resold either in pieces or parts. It would not make sense for Magna to be a long term owner of one of it’s customers. Why would anyone else choose to buy from Magna going forward? It might make sense for Magna to buy a percentage going in, and then trade that percentage for certain assets on the way out. You have to look at a Blackstone led effort as a 1-5 year game, not as an ongoing operation.
I think the real question is: can a car company selling to the consumer survive a Chapter 11 like an airline does? Obviously the private equity folks would like to take that route, flush the health care obligations, and then sell off the pieces or take some of it public.
If sales didn’t implode, it could be a big money maker post Chap 11. But as we’re seeing with Delphi, it takes a long time to get through the legal/financial process and the patient could die on the operating table.
But why would Ford want Jeep when it has Land Rover, hang on, Fords gonna sell Jag and Land Rover…you heard it here first folks!!
Dr. Z keep Jeep and take the money and run. Even if it is a loss, MB does not need the Chrysler group headache any more.
Magna could spin off their parts making division to keep other manufacturers happy.
“Indi500” makes a good point. From what it seemed at the time, Chrysler would probably have had a hard time surviving the years 1979 through ’82, if it had not been for the U.S. government buying a considerable number of cars for use by the Postal Service and other branches of the Federal government. (Yes, the USPS is strictly speaking, quasi-independent, but it wasn’t back then.)
Once people fear a car company is going under, it is not like an airline company going into Chapter 11, where the main concern is inexpensive seats (and even that may change now that Jet Blue showed the “hidden cost” of a cheap seat). The lack of warranty service and parts concerns oftentimes lead to people ensuring a car company goes under.
Looking way back in time, that’s what made it t impossible for Studebaker, as multi-model company, in 1963, despite a concerted effort towards new product. And of course, once they went to Canada, it was just a matter of time.
Whomever buys Chrysler, as it appears someone will, the key thing will be convincing potential customers that there will be a dealership network to service cars and trucks, while also providing parts.
Folks don’t for one moment fool yourself into believing,that one or all of the 2.5 going bankrupt,spells the end of the UAW/CAW.
On the contrary,big bad corps.crushing little people is where unions got thier start.
If and thats a big if,the 2.5 fall apart the unions will be there to help pick up the pieces.
you can bet on it.
People are not gonna stop buying cars.The survivers Toyota,Honda,Kia,and the others will run the plants around the clock.Quality will suffer,as will morale.
The transplants will slash wages and benifits to compete against the restructured 2.5.The very breeding ground of colective bargaining.
As the old saying goes “be carefull what you wish for”
“Argus Research Corp. auto analyst Kevin Tynan states “I don’t think Daimler-Benz is looking to dump Chrysler on the first company that waves a buck at them…”
The same can not be said of the average Chrysler dealer…any of which would gladly dump a Chrysler on the first person to wave a buck at them. Heck, they may even do it if you simply stood near their lot and rattled the change in your pocket.
I don’t want to hijack the thread, but I can’t resist mentioning something about unions. The town I grew up in had a huge Ford plant. At the end of the pick up truck line. There was a door that went up and down each time a truck was moved out into the holding pen where the rail cars came to get them. This door was actuated by a man (a guy I worked out with) who pressed a button to open the door and then close it again. All day. At union wages. Ford tried to install a trip wire to do the same thing, and the union raised a hue and cry and Ford backed down. Sorry, but any organization willing to inflict that kind of needless expense on their employer gets scant sympathy from me.
I know that at the Chrysler plant in Brampton, the union was basically told ‘You want a new model? Here are the concessions you have to make.’ End of story. That’s what the UAW is going to be faced with for some time to come.
“big bad corps.crushing little people is where unions got thier start. If and thats a big if,the 2.5 fall apart the unions will be there to help pick up the pieces.”
Really Mikey? Is that what happened in the steel industry and airline industry?
In a risk adverse environment, it’s impossible for these executives to conceive of every variable and make a wise decision. It’s likely that the risks involved in the transfer of ownership of Chrysler Corp are so high, that it’s just as well to stick it out.
The Brand story is the variable here that is unpredictable. It’s safe to say that the value of Chrysler is it’s Brands. Chrysler Group makes money two ways: Trucks and Minivans. Understanding that makes the Brand choice clear.
I predict that the key brand Jeep will be parceled away to GM, or Ford while Daimler keeps Dodge for their trucks and phases out Chrysler Brand in a buyout. If the UAW concedes to the 16.9b pension and medical defecit then it’s possible to imagine even Dodge would be put on the chopping block.
But Dodge/Mopar, and it’s history in Nascar makes a case for keeping it. Why not Pepsi or Philip Morris? What marketing executive wouldn’t give his eye teeth to have a product base which sole purpose was for marketing and advertising their other products? There’s money to be made here Pepsi and Nike…think big picture.
Jeep’s brand identity recognition is second only to Mercedes, but not much marketing potential there. Jeep is what Jeep is, and always will be. GM may offer to buy Jeep, but only to strengthen Hummer. Jeep is actually a very good option for a Chinese or Asian market, simply because of the emerging Chinese FME thing. Several knock-offs already sell mass quantities of fake Wranglers, who’s to say what the potential for Jeep Brand is in the 3rd world…
And Chrysler Brand profits (or seemingly lack therof) are essentially the result of two vehicles, the 300 and the Minivan. GM or Ford would pay top dollar to eliminate the competition in those markets. The 300 is a clever interpretation of the Mercedes E-Class for Americana. But the RWD luxury sedan market is quickly being saturated with top contenders. How long before 300 gets swallowed up by foreign brands that offer more for less? Also Chrysler “invented the minivan” but Honda perfected it. If Chrysler minivans went extinct, Honda would take that market over in minutes.
In summary, there is amazing Brand strength in the Chrysler portfolio. It’s worth a lot of money to the right buyer. Leaving the UAW debacle out of the scenario, strong cases can be made for parceling the group away.