DCX:

The Chrysler Corporation Returns

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Chrysler is Back in Private, American Hands; Current Management Stays On
On Monday, May 14, DaimlerChrysler and Cerberus announced the pending sale of the Chrysler Group, including Chrysler Financial. Among the firestorm of conferences, board meetings, and announcements following, we attended a Chrysler press conference where the new Chrysler Corporation boss Tom LaSorda gave a short briefing and took some direct questions.

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Perhaps the most significant element of the change in ownership is not who makes up the management team, or even in which country home base now is. It isn’t whether or not Wolfgang Bernhard returns to Chrysler, or even who is the boss. It is that the new company is privately held.
The new Chrysler Corporation is not required to report quarterly (or annual) sales, profits, returns, management salaries, production, or most of the other indicators that Wall Street watches so closely. The negative of quarter-by-quarter reporting and evaluation is a tendency to think short term, which can be deadly for a business whose core products have a four- to six-year natural lifecycle. (Including LaSorda’s and other managers’ salaries, which he seemed nearly gleeful that he’ll no longer report.) When pressed, LaSorda cited short-term focus as the driver for the ill-fated sales bank strategy, and as something done to please the German bosses and done against long-term strategy and goals. As a private company, LaSorda says, they “will be able to run it as we want, without worrying about quarterly numbers and what people think of them.” Chrysler Corporation will not report quarterly earnings (nor management salaries/benefits), and LaSorda would not commit to continued reporting of monthly unit sales.
LaSorda expects a Cerberus to demand a similar level of governance than they are used to, and they will have to ultimately make money for them. They will also need, as LaSorda recognized, to clearly define goals and metrics for employees to be able to target and meet. But these elements need not be part of the public forum or debate, and ownership support for long-term over short-term objectives can significantly impact overall strategy.
LaSorda was clear and emphatic that the Chrysler Corporation’s management team will not change from that today at the Chrysler Group. No further job cuts are planned as a result of the new ownership, but the 13,000 cuts spelled out in February are still on the chopping block. Speculation will continue as to whether or not Wolfgang Bernhard is brought aboard again, but plans to make that change were vehemently denied.


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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.


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