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The research presents a chronological snap-shot of events leading to Cerberus Capital Management's purchase of the Chrysler Corporation. It details the circumstances surrounding the purchase; explaining how Cerberus' $7.4 billion purchase equaled $650 million to Daimler. It further identifies the Daimler-Chrysler and Cerberus hope and plan to restore Chrysler back to its standing as the third largest automotive company in the United State. In addition, it provides and extensive examination of the out-come and a bird's eye view of the next steps for the Chrysler Corporation.
The Information was gathered from the history of the Chrysler Corporation, mass media analyses, and the economic rational of Daimler-Chrysler and Cerberus executives.
The research concludes with evidence pointing to Chrysler's relentless efforts to, again, become viable contributors to the automotive industry as well as the United States economy.
The Chrysler Corporation was founded by Walter Chrysler in January 1925. Among its contributions to the worldwide auto industry is the Road Wheel, designed to prevent flat tires from flying off the vehicle. A version of this safety feature is used throughout the auto industry today. As of December 2009, the Chrysler Corporation served as employer to 59,000 people throughout the United State. The company is currently headquartered in Auburn Hills, Michigan.
In 1998, the German based Daimler-Benz acquired the Chrysler Corporation and the company would spend the next nine years under the auspices of Daimler-Chrysler. Unfortunately, their combined hope of being an international powerhouse and leader in the auto industry within five years never materialized, and, in May 2007, Daimler sold the Chrysler Corporation to Cerberus Capital Management.
Daimler rationalized that the sale would lead to a cash flow and would help restore Chrysler back to its standing as the third largest automotive company in the United States. In addition, Daimler's liabilities would be minimized while profits would be maximized through the 19.9% stake it retained as part of the deal. Cerberus was chosen as Chrysler's new management team because it had a reputation for bringing undervalued companies back on track. Daimler believed that Cerberus had the capability of building a successful and sustainable future for both Daimler and Chrysler. According to Daimler-Chrysler CEO Dieter Zetsche, “We're confident that we've found the right solution that will create the greatest overall value for both Daimler and, Chrysler” (MSN Money 2007).
Cerberus, who is one of the largest equity investment firms in the United States, also believed in Chrysler valuable future. Cerberus understood the risk involved, but were confident that, “it could steer the automaker to firmer ground and remake Detroit in the process” (Forbes 2009). Accordingly, Cerberus purchased Chrysler for $7.4 billions. In lieu of payment, however, Cerberus agreed to relieve Daimler of its $20 billion pension and health care obligation to Chrysler employees, invest $5 billion into the new company and another $1.05 billion into the financial business (Deal Journal 2007). Daimler's gross payment for the Chrysler sale was $1.35 billion. However, Daimler agreed to loan the new company $400 million and absorb the $1.6 billion costs related to Chrysler's restructuring efforts. Daimler's net total from the transaction, then, was $650 million. This, in essence, was the resolution of one of the largest trans-Atlantic merger ever; a merger that was seemly doomed from the start. Chrysler, whose cowboy image of risk taking and producing economically affordable vehicles, clashed with Daimler's reputation of producing quality luxury cars at any cost. From the beginning, according to Daimler-Benz CEO, the ‘Merger of equals' was a term used for the sole purpose of getting the support of the American workers. It was never intended to give Chrysler equal value. At the finalization of the sale, it was apparent that the opportunistic behavior came at a high transition cost when Daimler's $7.4 billion deal turned into a bill. This company that, “Daimler purchased only nine years earlier for $36 billion was now being sold for 7.4 billion,” with no real profit to show during its tenure (Deal Journal 2007).
Cerberus' initial plan for the new company was to keep Chrysler's financial arm and make profits through loan portfolios. Later steps toward restoration included developing a leadership role in environment friendly technologies and increasing the value of Chrysler by reducing cost and increasing sales. Cerberus would also realize other benefits from the deal. The purchase represented an opportunity to expand Cerberus' core business and explore new markets in different regions. However, Chrysler's inability to control its production cost, its lack of technology, the enormous competition from the external markets, and the failing U.S. economy, hindered the process. Higher fuel prices forced American consumers to seek more fuel-efficient vehicles, thus, the Chrysler produced Sport Utility Vehicles were being replaced with Japanese produced fuel- efficient vehicles. To offset the slump in sales, Chrysler cut its product line of PT Cruiser Convertibles, Dodge Magnums, Pacificas and Cross Fires. It also reduced its dealerships by 70%; but to no avail. By December 2008, 50% of Chrysler's plants were scheduled to close and nearly13,000 Chrysler employees were being laid off.
In April 2009, Chrysler filed Chapter 11 bankruptcy and announced its plans to negotiate a partnership with the Italian automaker Fiat. As a result, Cerberus suffered a total loss on its 80.1% equity investment in the Chrysler Corporation (News Kontent 2009). Cerberus' Chief Operating Officer, Mark Neporet told Forbes, “We are optimistic that Chrysler's Chapter 11 case will lead to the expeditious and efficient completion of the restructuring that has been agreed upon by the major stakeholders, and we will continue to do all that we can do to support a successful outcome,” however, he continued, “Cerberus is not a deposit-taking institution that can act as an ATM machine for its portfolio companies.” (Forbes 2009). The COO's statement marked the end of the Cerberus Chrysler era.
After having lived off of government loans for several months, Chrysler, again, sought the help of the U.S. government. The government in turn offered $6.6 billion in working capital for Chrysler's restructuring process. It also committed $3.3 billion to repay Chrysler debtors and was prepared to loan $4.7 billion immediately and another $288 million over time to support Chrysler in its bankruptcy effort.
Chrysler has left no stone unturned in it zeal to regain its standing as the third largest auto maker in the United States. Chrysler remains diligent in its efforts to advance technology and produce the kind of fuel-efficient vehicles that the American consumers are willing to purchase. Hopefully, its obvious commitment to restoration, has set Chrysler on a course to be a viable contributor to the auto industry as well as the U.S. economy.
As Cerberus Capital Management is primarily an equity investment firm, purchasing an automotive company; especially one in financial crises, was not a sound business decision. While research acknowledges Cerberus' desire to diversify, this purchase, even in a sound economy, was risky at best.
Daimler' decision to sale, however, provided the best opportunity to stop the losses it continuously incurred through its troubled Chrysler unit. In addition, it can, now, focus on restoring its parent company's tarnished reputation and get back to the business of producing top quality luxury vehicles; the business, by-the-way, that is primarily responsible for its success to date.
Chrysler executives, UAW President, Ron Gettelfinger, and Chrysler employees were excited to have the company back in the hands of an American entity, but Chrysler's real benefit in the sale has yet to be determined.
We do not believe that the sale could have been worst because each company loss as a result. Daimler paid $36 billion for a company that it sold for $7.4 billion. Chrysler did not get the technology to product fuel-efficient vehicles and, it had to restructure under, yet, a new management team. Cerberus purchased the ailing Chrysler Corporation for a bargain $7.4 billion but loss its entire investment when Chrysler's Chapter 11 bankruptcy.
In hindsight, if we were to evaluate the transaction as consultants, we would have wholeheartedly recommended the sale to Daimler and encouraged Chrysler to be a willing participant. As a consultant to Cerberus, however, we would have recommended anything but the purchase of the Chrysler Corporation.
Migloire, G. (2009, April 30). Chrysler files for bankruptcy, to merge with Fiat, Obama announces. Retrieved April 4, 2010, from http://www.autoweek.com/article/20090430/CARNEWS/304309998
Statement by Cerberus Capital Management - Auto News from April 30, 2009 Read more:http://www.motortrend.com/features/newswire/43030/index.html#ixzz0kHvYdfoK. (n.d.).Retrieved April 4, 2010, from http://www.motortrend.com/features/newswire/43030/index.html
Cerberus Capital Management LP. (n.d.). Retrieved April 5, 2010, from http://privateequityblogger.com/2008/08/cerberus-capital-management-lp.html
Moyer, L. (n.d.). How Chrysler Put The Bite On Cerberus. Retrieved April 5, 2010, from http://www.forbes.com/2009/05/01/bankruptcy-cerberus-chrysler-business-autos-cerberus.html