May 14 2007 7:20PM
FRANKFURT, GERMANY -
German-based DaimlerChrysler AG said Monday it will sell almost all of money-losing Chrysler to a private equity firm for $7.4 billion, backing out of a troubled 1998 takeover of the Jeep and Dodge maker aimed at creating a global automotive powerhouse.
It was the most expensive and one of the least successful mergers in the history of the auto industry, says CBS News correspondent Alexis Christoforous.
Eighty percent of Chrysler Group, burdened by high pension and health costs and declining market share in the United States, will be sold to Cerberus Capital Management LP. Cerberus is taking a huge risk by agreeing to take on billions of dollars in pension and retiree health care costs at Chrysler.
Cerberus Chairman John Snow, a former U.S. treasury secretary, told a news conference in Germany that the New York-based private equity firm believes in Chrysler and wants to see it recover.
"We think at this particular point in Chrysler's history, there may be opportunities in the private world, the world of private investment, that create more room for growth and expansion, that allow management to focus with greater intensity on the day-to-day business of producing better cars," Snow said.
DaimlerChrysler will sell 80.1 percent of Chrysler to Cerberus in a stunning reversal of the $36 billion takeover by Daimler-Benz AG in 1998.
Cerberus has steadily been building strength in the automobile business. It led a consortium that bought a majority stake last year in General Motors Acceptance Corp., the financial arm of GM, and plans to invest in ailing auto parts giant Delphi.
"They bring some financial discipline that I think this industry has needed," David Cole of the Center for Auto Research told auto reporter Jeff Gilbert of CBS radio station WWJ. "Unfortunately, that's often very painful."
The prospect of a sale to a private equity firm had worried unions in the United States and Canada because of the firms' tendency to slash costs and jobs.
"Hopefully, it will be a good combination," said Kevin Guyette, a Chrysler employee at the Warren, Mich., truck plant. "I'm not so sure. I guess time will tell."
"We knew it was coming. I just hope they take better care of us. We have to wait and see what will happen," said Paul Mastalanski, a 39-year Chrysler employee at the same plant.
Daimler will retain 19.9 percent of Chrysler and continue to work with it on drive systems, purchasing, sales and financial services outside North America. But it was clear that DaimlerChrysler and its chief executive Dieter Zetsche, who tried to prop up sales in the U.S. with his "Dr. Z" television commercials, had lost confidence that a combined Chrysler and Daimler could be a worldwide automotive leader.
"We determined that DaimlerChrysler, as currently structured, would not provide the best" framework, Zetsche told reporters in Stuttgart, adding that "at the same time, given my experience with and commitment to Chrysler, this was a difficult task for me personally."
DaimlerChrysler said the deal is likely to be completed by the third quarter and that it would reduce its overall profit by as much as $5.4 billion for 2007.
Snow said that under Chrysler's leadership, the company's quality and productivity have risen and it has a variety of new products that will be well-received in the marketplace.
"We're going to support those initiatives and we're going to support your plans," he said.
Shareholders must approve changing the German company's name to Daimler AG. A vote will likely be scheduled this fall, the company said.
The German-American automaker said an affiliate of Cerberus will hold the majority of a new Chrysler Holding LLC, while DaimlerChrysler will keep a 19.9 percent stake.
Private equity firms typically use money provided by pension funds and hedge funds and wealthy private investors to acquire public companies or parts of companies and take them private, often to reorganize and later sell at a profit.
But Snow said Cerberus would focus on longer-term earnings.
"We don't think about the next quarter. We don't think about what analysts have to say about us. We care very much about producing long-term results for investors," he said.
The United Auto Workers' endorsement of the transaction was a shift from earlier this year, when UAW President Ron Gettelfinger warned that a private equity buyer would "strip and flip" the company by selling it off in pieces.
Gettelfinger, speaking on a Detroit radio station, said he made a last-minute pitch to keep Chrysler with Daimler over the weekend, but when that failed, he decided to embrace the Cerberus purchase.
"We did make a last-ditch effort pitch this weekend in Stuttgart with Dr. Zetsche about maintaining the status quo. That appeared to be less and less an option. He made it unequivocally clear it was no longer an option. He spent an hour and a half taking us through the entire selection process," Gettelfinger said.
"We made the pitch all the way home that we wanted the Chrysler Group to stay under the Daimler umbrella but it's not there. The decision has been made, we're supportive of it."
"We're going to close that past chapter. We're going to move forward."
Canadian Auto Workers President Buzz Hargrove said he was assured that the collective bargaining agreement with Chrysler would be honored and that no jobs would be eliminated.
John Snow, Toledo native and UT graduate, is chairman of Cerberus.
The UAW represents 5,000 workers at DamlerChrysler's Toledo North Assembly Plant, and another 1,500 at the Toledo Machining Plant in Perrysburg. UAW President Ron Gettelfinger says the deal with Cerberus was in everyone's best interest. But his Canadian counterpart Buzz Hargrove says he has "enormous concerns" about the deal.
Hargrove says many private equity groups have a long-standing history of job cuts. Union leaders will meet tomorrow in Detroit with Chrysler CEO Tom LaSorda and senior Cerberus management. They're hoping to receive assurances that no additional job cuts would be made before the current labor agreement expires.
No one knows what the new company will be called. The deal is likely to be complete by the third quarter.
Chrysler lost $1.5 billion dollars last year and is undergoing a restructuring plan that will eventually shed 13,000 jobs.
Other companies had bid on Chrysler, but didn't get involved in the high-level talks. Both Magna International, which already runs some of the Supplier Park plants in Toledo, and a Blackstone Group-led consortium had put in bids that were rejected.
Cerberus is based in New York and has large stakes in companies with $60 billion dollars in revenues. The CEO of DaimlerChrysler says it's a new start for Chrysler and Daimler. The chairman of Cerberus Capital Management says it's a sign of faith in the Chrysler brand.
The New York private equity firm is named after the three-headed hound that guarded the gates of hell in Greek mythology.
According to its web site, Cerberus Capital Management, L.P. was established in 1992, and is headquartered in New York. It has more than $16.5 billion under management in funds and accounts.
Cerberus owns Guilford Mills, the largest automotive seating supplier in the US, and Peguform Group, a German-based manufacturer of interior and exterior plastic auto parts. It also owns all or part of Alamo and National Rental Cars, Air Canada, Formica, GMAC, and other companies worth about $60 billion dollars in revenue per year.
Snow is a 1962 graduate of the University of Toledo. He recently served as the country's Secretary of the Treasury before going to Cerberus.
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