Cerberus to Take 80% of Chrysler

Back in 1998, German car manufacturer Daimler bought America’s faltering Chrysler for $37 billion. Today, it has accepted an offer from Cerberus Capital Management (a private equity investment operation) to sell 80.1% for €5.5 billion or about US$7.41 billion, a stunning loss. The Germans, who almost made communism work, couldn’t get Chrysler into the black. While Cerberus may have better luck, one shouldn’t wager much on the proposition.

DaimlerChrysler chairman and chief executive Dieter Zetsche breathed a sigh of relief in announcing the deal, “With this transaction, we have created the right conditions for a new start for Chrysler and Daimler.” At least Daimler will stop hemorrhaging cash. The company lost $1.5 billion last year. Meanwhile, the entire DaimlerChrysler operation made a profit of $7.3 billion. Daimler has effectively cut off a gangrenous limb.

Cerberus does have one advantage over Daimler. As a private equity firm, it can take a longer-term view of Chrysler. John Snow, the chairman of Cerberus and until recently the US Treasury Secretary, issued a statement saying as much, “We are aware that Chrysler faces significant challenges, but we are confident that they can and will be overcome. A private investment firm like Cerberus will provide management with the opportunity to focus on their long-term plans rather than the pressures of short-term earnings expectations.”

Cerberus can expect some support from the United Auto Workers, who lost 13,000 jobs in the latest restructuring. UAW President Ron Gettelfinger said union had “concluded that the transaction with Cerberus is in the best interest of our membership, the Chrysler Group and Daimler. We are satisfied now that the decision has been made so that our membership and management can focus on designing, engineering and manufacturing the finest quality products for the future success of the Chrysler Group.”

The problem for Chrysler Holding, as the beast will be called, remains the same as ever. It has to pay billions in healthcare for its employees, retirees and their families as it agreed to do in previous contracts while it tries to sell light trucks and other gas guzzlers when a gallon of regular costs, on average, more than $3. Chrysler is slated to return to profitability in 2008. Maybe, but if so, would Daimler have sold it? As ever, healthy skepticism is in order.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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