The Saga of the Chrysler Sale to Cerberus Capital Management
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.
Founded in 1925 by Walter Chrysler, the Chrysler Corporation is home to 59,000 employees throughout the United States. It is currently headquartered in Auburn Hills, Michigan. German based Daimler-Benz acquired the Chrysler Corporation in 1998 and the company would spend the next nine years under the auspices of Daimler Chrysler AG.
Daimler Chrysler's hope of becoming an international powerhouse and leader in the auto industry within five years never materialized. 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.
Chrysler, on the other hand, reasoned that Daimler-Benz's superior automotive technology, welcomed Chrysler's access to the U.S. market, as an equal partner. Their combined strengths and ideas would secure their role as a worldwide leader in the automotive company.
However, the cultural clash, and uniquely different management styles were issues they were unable to overcome. As a result, Daimler loss billions of dollars on the merger and the Daimler-Benz's reputation was severely tarnished. In May 2007, Daimler sold the Chrysler Corporation to Cerberus Capital Management.
Daimler rationalized that the 7.4 billion bailout would lead to a cash flow and would help restore Chrysler 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 there were risk involved, but were confident that it could turn Chrysler around, while remaking Detroit in the process (Forbes, 2009). Cerberus' initial plan for the new company was to keep Chrysler Financial and make profits through loan portfolios. Later, it would develop a leadership role in environment friendly technologies, become more customer oriented and increase the quality of the product. The purchase also represented an opportunity to expand Chrysler's core business and explore new markets.
Market, Product Line, Production, Firm Structure, Financial Resources, Government Resources
The U.S. auto industry, in general, faced a global financial downturn. Fuel and energy prices were increasing and foreign competition was staggering. The industry offered substantial discounts to remain competitive. Chrysler, in particular, however, could not control its production cost and did not have the needed technology to compete successfully. Instead of diversifying to accommodate the market, Chrysler continued to product Sport Utility Vehicles (SUV). American consumers sought more fuel-efficient cars and began to substitute SUVs 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%, to cut transaction and administrative costs.
The Chrysler Corporation is a U.S. auto company founded in January 1925 by Walter Chrysler. From 1998 to 2007 it operated under Daimler Chrysler AG. In 2007 Cerberus Capital Management purchased 80.1% stake in the company, including Chrysler Financial. Daimler Chrysler AG held the remaining 19.9% (Deal Journal, 2007).
Cerberus purchased 80.1% of Chrysler for $7.4 Billion. 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 restructuring cost. Daimler's net total from the transaction, then, was $650 million. The 19.9% that Daimler retained provided an equity ratio of over 40% in the new company. In exchange for Daimler's willingness to provide said funds, Chrysler agreed to cut 13,000 jobs to become more profitable.
Chrysler, sought the help of the U.S. government, who 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 help Chrysler achieve financial stability and become successful in the long run.
How did it turn out? Could it have been better? Could it have been worse? In hindsight, would you recommend the action if you were asked to evaluate it as a consultant?
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' CEO Mark Neporet told Forbes that Cerberus is supportive of Chrysler and its Chapter 11 case. However, it could not act as an ATM machine for its portfolio companies (Forbes, 2009).
Chrysler has left no stone unturned in its zeal to restore itself to good standing in the automotive industry. Its obvious commitment to restoration, hopefully, has set it on a course to be a viable contributor to the auto industry as well as the U.S. economy. 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 produce fuel-efficient vehicles. Cerberus loss its entire investment when Chrysler filed Chapter 11 bankruptcy.
Daimler's decision to sale, however, provided the best opportunity to stop the losses it continuously incurred through Chrysler. In addition, it could 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 had a better chance of being successful under the management of Cerberus Capital Management, who believed in its viability.
However, purchasing an automotive company; especially one in financial crises was not a sound business decision for Cerberus. While research acknowledges Cerberus's desire to diversify, this purchase, was risky at best. In hindsight, if we were to evaluate the transaction as consultants, we would have recommended the sale to Daimler and encouraged Chrysler to be a willing participant. As consultants to Cerberus, however, we would have recommended anything but the purchase of the Chrysler Corporation.
Moyer, L. (2009, May 1). How Chrysler Put The Bite On Cerberus [Newsgroup message]. Retrieved from http://www.forbes.com
Roland, N. (2010, March 26). Chrysler will offer to reinstate 50 dealerships. Retrieved April 4, 2010, from http://www.autonews.com
Migloire, G. (2009, April 30). Chrysler files for bankruptcy, to merge with Fiat, Obama announces. Retrieved April 4, 2010, from http://www.autoweek.com
Lippert, J., & Ramsey, M. (2008, June 18). Cerberus Rues Chrysler Drain as Nardelli Fails to Arrest Losses. Retrieved April 4, 2010, from http://www.bloomberg.com
Zatz, D. (n.d.). Cerberus Buys Chrysler: The Ongoing Story. Retrieved April 4, 2010, from http://www.allpar.com
Cerberus Capital Management LP. (n.d.). Retrieved April 5, 2010, from http://privateequityblogger.com
Details on U.S. Government Support. (2009, April 30). Obama Administration Auto Restructuring Initiative. Retrieved April 5, 2010, from http://www.financialstability.gov
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