Trans-Atlantic Breakup

Chrysler Group's recovery plan and product programs remain intact, and none of its three brands will be jettisoned due to the impending takeover by Cerberus Capital Management, CEO Tom LaSorda says after DaimlerChrysler AG announced the sale May 14.

But he does say Chrysler is likely to form additional strategic alliances on small-car development, including possibly expanding a pending deal with Chery Automobile Co. Ltd. in China.

“Cerberus has signaled support of the Chrysler leadership team, including me. They've also said no job cuts are planned at this time,” LaSorda says.

“The recovery plan has been endorsed by the new owners. And they've also endorsed the product plan and investment we announced in Michigan and other investments planned for the coming months,” he adds. “And all three brands are staying together. They will not be broken up under any circumstances.”

DaimlerChrysler will sell a majority interest in Chrysler Group and Chrysler Financial Services to private-equity firm Cerberus for €5.5 billion ($7.4 billion).

Cerberus beat out several other bidders for the auto maker, including Blackstone Group, another private-equity investor, and supplier Magna International Inc. Kirk Kerkorian's Tracinda Corp. also made a pitch for Chrysler. A proposal for an employee-led buyout made by United Auto Workers union members never was considered, the auto maker says.

In announcing the deal, CEO Dieter Zetsche says Daimler-Benz AG and Chrysler Group management “overestimated the potential synergies,” when it merged the two auto makers in 1998.

“The synergies between premium (vehicles such as Mercedes models) and volume (Chryslers) are limited,” Zetsche says in a press conference from Stuttgart. “We overestimated the impact of Mercedes technology on Chrysler. The American volume customer was not willing or able to pay significant premium prices.”

Under terms of the deal, which DC expects to close in the third quarter, Cerberus will acquire 80.1% equity in a new privately held company, Chrysler Holding LLC. DaimlerChrysler, which is proposing to shareholders a name change to Daimler AG, will retain 19.9% interest.

The transaction actually will end up costing DC €500 million ($677 million), but in return it will be absolved of all pension obligations, which will be retained by the new company. Those obligations, totaling an estimated $19 billion, currently are significantly over-funded, DC says.

While Chrysler's relationship with its German parent is fizzling, the Auburn Hills, MI, auto maker will look for additional alliances that would allow it to outsource the engineering and development of small cars. “We'll definitely pursue a partnership with someone who can do that,” LaSorda says.

Chery is a leading candidate. Chrysler already has a tentative pact to source B-segment cars (smaller than the Caliber) from Chery. That deal awaits final approval from Chery and the Chinese government.

The agreement has a framework that allows it to be expanded, and LaSorda says that possibility will be studied. “They will be our first (choice of) partner in this area.”

Cooperation with the new Daimler AG will continue, particularly when it comes to sharing Mercedes diesel and safety technology, LaSorda says. Chrysler also will continue to have access to the Two-Mode hybrid system developed by DC, General Motors Corp. and BMW AG that will be used in the Dodge Durango and Chrysler Aspen SUVs.

In addition, Mercedes and Chrysler will look to continue coordinating purchasing where it makes sense, he says.

Calling it the most “exhilarating couple of days for me,” LaSorda says the Cerberus purchase is “a dream come true,” because it will allow him to run Chrysler as a private company unfettered by public quarterly financial reporting.

The short-term pressures under DC ownership, he says, are what led Chrysler to build excessive vehicle inventories last year, a strategy that left it saddled with hard-to-sell cars and trucks and soured its relationship with dealers.

“Moving forward, we can take a longer-term outlook,” he says.

Citing Cerberus' “deep (management) bench,” LaSorda says he also is looking forward to working with executives such as Wolfgang Bernhard, a former Chrysler chief operating officer now with Cerberus, although Bernhard will not be part of the Chrysler management team.

The structure of the new Chrysler board remains uncertain. Daimler may have seats, but those will be minor in number, LaSorda says. Chrysler management, not Cerberus, will be in charge of the upcoming labor negations this fall with the UAW, he says, citing health-care and other competitive costs as the primary issues for the auto maker.

A meeting between LaSorda, Cerberus co-founder Steve Feinberg, UAW President Ron Gettelfinger and Canadian Auto Workers President Buzz Hargrove proved positive, both LaSorda and Hargrove say.

“I think they were quite impressed,” LaSorda says of the two union chiefs. “(Feinberg) is a great guy, a straight shooter — a blue-collar guy is how he grew up. He drives American cars and trucks and believes his company can add value in turning around a great American car company. I think both the UAW and CAW want to be partners (in the recovery).”

LaSorda says he doesn't foresee an acceleration of product plans or the recovery program under Cerberus.

Asked if he expects Cerberus to still be a majority stakeholder in Chrysler five years from now, LaSorda says, “I would expect to see them in play.”

Zetsche absolves DC management for the problems that marred the trans-Atlantic merger. “I don't know if any due diligence over any extended sphere of time could have, at that time, given us a better orientation in this regard,” he says of the inability to achieve synergy.

In the end, it came down to the tough admission that Daimler and Chrysler were not so compatible after all.