Chrysler Is for Sale. Now What?
April 05, 2007

Now that it is a foregone conclusion that DaimlerChrysler has put Chrysler Group up for sale and it quite possibly will be sold to a private equity firm, what’s next?

Everyone –- employees, suppliers and the media –- wants a definitive answer to what will happen to Chrysler once it is sold. How will the deal work? Will Chrysler still exist when all is said and done? If it does, what will it look like?

Despite relentless questioning, no one knows. Not even DaimlerChrysler insiders. The sale of Chrysler is unprecedented. There’s no blueprint for how a sale of an auto company to a private equity firm would work. In an interview with CNBC's Morning Call Wednesday, I suggested we spectators “expect the unexpected.”

Foregone Conclusion: Chrysler for Sale

Facing a crowd of 8,000 shareholders, some of them insistent on a Chrysler sale, DaimlerChrysler CEO Dieter Zetsche -- for the first time -- confirmed Wednesday at the company's annual meeting what had been speculated and even reported as fact: Chrysler, indeed, is for sale.

Zetsche confirmed DaimlerChrysler is talking with potential buyers, though he did not reveal the suitors. The leading candidates are believed to be two private equity firms, the Blackstone Group and Cerberus Capital Management, and Canadian auto supplier Magna International Inc., possibly with private equity firm Ripplewood.

There’s no turning back for DaimlerChrysler. The company’s shares have soared by 30% percent since Zetsche announced on February 14 that the automaker was exploring all options, including a sale of Chrysler.

Daimler Retaining a Stake?

Yet, a sale of Chrysler will be a complicated deal with lots of elements to negotiate. The current suitors could opt not to go forward. Still others could step in. Or DaimlerChrysler could find itself stuck.

What appears a likely scenario is that DaimlerChrysler could retain a stake in Chrysler if it is sold. Zetsche confirmed just that at the annual meeting.

“We need to keep all options open. We need to keep maximum scope for maneuver,” Zetsche said in his opening statement.

Such a stake makes sense for DaimlerChrysler and a buyer of Chrysler because the operations of DaimlerChrysler and its Mercedes-Benz and Chrysler units have become quite integrated.

What's the Buyer's Intent?

With a complicated automaker like Chrysler, quite deeply entwined with DaimlerChrysler, this deal will be unlike others -- whereby a private equity firm buys a company, breaks it up and sells it in pieces.

The intent of Blackstone is the least obvious. The firm has invested in more than 100 companies in entertainment, communications, food and health care. It has some automotive experience, with investments in auto suppliers, TRW Automotive and Collins & Aikman.

Magna has made no secret. For the past couple of decades, Magna CEO Frank Stronach has expressed his desire to be in automotive assembly.

Most intriguing is the Cerberus bid. With its recent investments and hiring of high-horsepower automotive talent, Cerberus appears to be serious about the automotive industry. It looks like it is building a vertically integrated automotive enterprise.

In terms of automotive talent, former Ford executive David Thursfield heads its automotive unit. Also brought into the fold of late have been former Chrysler/Volkswagen executive Wolfgang Bernhard and retired Ford exec Robert Rewey.

On Thursday, Cerberus agreement to buy bankrupt auto supplier Tower Automotive Inc., in a deal valued at about $1 billion was blessed by the bankruptcy judge. Cerberus also is part of a group planning an investment of up to $3.4 billion for bankrupt Delphi Corp. Cerberus led a consortium of investors to buy 51 percent of General Motors Acceptance Corp., a deal worth $14 billion in cash over three years to General Motors. And Cerberus purchased the flooring and acoustics business of Collins & Aikman, another bankrupt automotive supplier being dissolved.

On the Table

A number of complicated items are on the bargaining table, some of which could cause the suitors to walk away.

At the top of the list, a new buyer would absolutely insist on concessions from Chrysler’s unions, the United Auto Workers and the Canadian Auto Workers. Refusal by the unions could be a deal breaker.

Also on the list of items to negotiate is Chrysler’s huge pension and health care liability. Who will pay it? The new owner certainly doesn’t want to pick up the entire tab.

How will the complicated, integrated operations be untangled or maintained in an equitable fashion? For instance, Chrysler and Mercedes-Benz now work through a common purchasing group, giving them enormous clout with suppliers. Separating the two groups would diminish that clout.

Similarly, how will they untangle or deal with other integrated operations, like product development and technology ventures, such as the one DaimlerChrysler has with General Motors and BMW to develop hybrids, which will be introduced on the Dodge Durango.

What happens to DaimlerChrysler’s China operations? Chrysler was first to enter China with its Beijing Jeep operation. That venture has been used as a springboard for both Chrysler and Mercedes-Benz to expand in the world’s fastest growing market. A new owner surely would want a piece of that action.

Other international operations have to be deal with in negotiations. Chrysler depends on help from Mercedes-Benz in its ongoing drive to boost sales of vehicles outside North America, just beginning to pay dividends for Chrysler.

What happens to DaimlerChrysler Financial? It supports Chrysler/Dodge/Jeep customers and dealers as well as Mercedes-Benz customers and dealers. And it does so efficiently with its combined back office operations.

And those are just a few of the issues on the table, ensuring these will be complicated and delicate negotiations no matter who the buyer is.

Joe Szczesny contributed to this report.

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