Cerberus Takes Chrysler Off Daimler's Hands

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Private equity firm Cerberus is in the process of taking Chrysler Group out of the hands of the automaker formerly known as DaimlerChrysler AG (DCX). What will soon become Daimler AG will continue to own 19.9% of the new company – Chrysler Holdings LLC – with Cerberus owning the remainder. This is the end of the Jurgen Schrempp dream for Daimler-Benz to create a global auto colossus made up of Mercedes-Benz, Freightliner, Chrysler, Mitsubishi and Hyundai.
Daimler-Benz took over (no merger – ever) Chrysler Corporation in November 1998 for $36 billion. Nine years later, DCX agreed to sell 80% of what is now Chrysler Group to Cerberus Capital for $7.4 billion. Clearly Schrempp’s plan did not work.
Impact on Opinion of Chrysler –
In late March, a VehicleVoice survey indicated that the opinion of Chrysler Group had deteriorated drastically from a year earlier. Our respondents variously said: “Daimler bought ’em, raped ’em and threw them away,” “Why would I buy a car from a company that’s parent company is trying to sell it?” Perhaps the purchase by Cerberus will serve to offset some of this deterioration, but time will tell.

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Cerberus Has Auto Industry Heavyweights Involved
Cerberus is the mythological three-headed dog that guards the gates of hell. Cerberus Capital is an interesting firm in its own right. Secretive to a fault, at least three auto industry heavyweights are on its letterhead (if they had one): David Thursfield, former Vice Chairman of Ford and an aggressive cost cutter; Wolfgang Bernhard, former COO of Chrysler Group (with Zetsche) and then head of Volkswagen in Germany prior to his Cerberus gig; and Robert Rewey, former head of Sales at Ford. Rewey could sell anything any day of the week. While Cerberus says they will keep the present Chrysler Group management team in place, it is only a matter of time that “adjustments” begin being made.
Remember the character in Pretty Woman played by Richard Gere? He was a private equity magnate that wanted to buy a shipbuilder, break it up and sell the pieces for a profit. A private equity firm like Cerberus isn’t too much different and the jury is still out on how Cerberus will handle its investment in Chrysler Group.
Cerberus has an interesting portfolio – a large stake in Delphi, 51% of GMAC – General Motors’ financing arm, Tower Automotive, Guilford Mills, Albertson’s, Sav-On, and others. The fact that Cerberus now controls Chrysler Financial and over half of GMAC gives it substantial clout in the automotive financial services market.
So, now, Chrysler Holdings can stay below the radar as a privately held company. Unfettered of its requirements to be transparent financially the company will largely be able to restructure itself outside the glare of the media and Wall Street. What will emerge after three, five or seven years is unknown, but the story will be fascinating to watch as is unfolds.


Some Good from DCX: Global Engine Alliance
Maybe the best thing to come out of DCX is the Global Engine Alliance between Chrysler Group, Hyundai and Mitsubishi. Four-cylinder engines from the Alliance are designed by Hyundai and tweaked by the company using them. Plants in Korea, Japan and Michigan assemble the powerplants.
More Good from DCX – Rear Wheel Drive LX Platform
The next best thing to come out of DCX is the rear wheel drive Chrysler LX platform underpinning the Chrysler 300, Dodge Magnum and Dodge Charger. Using components from previous Mercedes’ platforms, Chrysler was able to cost effectively develop a very compelling platform that has stayed fresh even after several years on the market.
Grandiose Globalization Plans Collapse
But after sending German and American DCX management to “fix” Mitsubishi, DCX divested itself of the ailing Japanese automaker, pulling its management out and quickly dumped its 10% stake in Hyundai. Clearly, Schrempp’s globalization plan was flawed. When Dieter Zetsche moved from Chrysler Group to take the reins at DaimlerChrysler in Stuttgart it was thought that the man who had the keys to the code for both companies was now in the right place to get them working together.
Keep the Plants Running At All Costs – UAW Contract Offsets Good Sense
With Chrysler building vehicles for an order bank in the USA, inventories quickly got out of hand and dealers mutinied. Thinking that it was better to keep UAW plants running rather than shutting them down and paying workers’s salaries anyway, Chrysler kept the plants producing cars and trucks even when there were no sales. Today, it is no wonder that Chrysler’s remaining stock of 2006 model year vehicles can be had for a deep discount.
Is This Good News? Or bad?
Clearly too early to say for sure… but this may be the best thing to happen to Detroit in decades. The fundamental problem that the Detroit 3 face is their financial lack of competitiveness with the likes of Toyota, Honda, Nissan and Hyundai. There are many aspects to that problem, but one of them is the UAW. The union may now, finally, get the message that the compensation and benefits they have successfully negotiated over decades are simply no longer viable. My guess if that Cerberus will be able to get a “new deal” from the UAW and that GM and Ford will follow suit. And that just might save “Detroit” – at least for awhile. It will not solve the problem – it is to complex, with many root causes, but this may be a key event in American automotive history.

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