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Charting Chrysler's Next Move

Charting Chrysler's next move
David Lazarus

Wednesday, May 16, 2007

This week's $7.4 billion sale of Chrysler Group to a New York private-equity firm could mark a bold opportunity for one of the great names in the auto industry to be reinvented as a leader in next-generation, super-fuel-efficient vehicles.

But it won't.

"I'd like to think there's some grand scheme to all this," said Catherine Madden, a senior automotive analyst at market researcher Global Insight. "However, I don't think there is."

So why would Cerberus Capital Management want to buy a company that lost as much as $1.5 billion last year and is saddled with roughly $18 billion in outstanding pension and health care obligations for workers and retirees?

"I don't have a good answer for that," Madden replied. "I suppose they think they can make some money from this."

There it is. As Madden and other analysts see it, what Cerberus has its eye on isn't a remaking of Chrysler as the leading automaker of the 21st century, going toe-to-toe with Toyota for dominance of hybrid-vehicle sales.

Rather, Cerberus is looking to capitalize on its investment in a money-losing business by slashing costs, wringing additional concessions from autoworkers and generally sprucing up the balance sheet for whoever buys the company next.

"It doesn't bode well that the firm buying Chrysler is named after the three-headed dog that guarded the gates of hell," said Dan Becker, director the Sierra Club's global warming program.

The major players in this week's deal did their best to put a smiling face on the proceedings.

"With this transaction, we have created the right conditions for a new start for Chrysler and Daimler," said Dieter Zetsche, chairman of Germany's DaimlerChrysler, which purchased the U.S. automaker for $36 billion in 1998.

John Snow, the chairman of Cerberus, said the investment firm "believes in the inherent strength of U.S. manufacturing and of the U.S. auto industry. Most importantly, we believe in Chrysler."

Even the United Auto Workers got in on the act. "We're confident that we've found the solution that will create the greatest overall value, both for Daimler and Chrysler," said the union's president, Ron Gettelfinger.

If Cerberus' Snow sounds familiar, by the way, that's because he served as Treasury secretary under President Bush. Another prominent figure at Cerberus is former Vice President Dan Quayle, who heads the firm's global investments group.

Cerberus is acquiring 80.1 percent of Chrysler. Daimler will retain 19.9 percent but relinquish control of the company.

Chrysler has had a particularly rough road in recent years because two of its core brands are Dodge and Jeep. Soaring gas prices have made the company's pickup trucks and sport utility vehicles less attractive to consumers.

Chrysler now sells fewer cars in the United States than General Motors, Ford and Toyota.

"Short term, it will be business as usual," said Madden at Global Insight. "You cut costs and get concessions from the union. What will consumers see? They'll see very little that's different."

Ron Harbour, an auto-industry consultant in Michigan, agreed that this is the likely scenario for at least the next few years. Further along, he said, Cerberus will have to find some way to distinguish Chrysler from larger rivals.

"In order for them to drag Chrysler out of its current situation, they're going to have to show how Chrysler is different from the rest," he said. "If it's just another me-too auto company, it's not going to work."

The Sierra Club's Becker said the way forward should be clear to Cerberus.

"If they want Chrysler to be successful, they have to compete with Toyota and Honda, which are making cleaner vehicles," he said. "If they're going to just go along with GM and Ford, it's a one-way road to oblivion."

But there's been no indication from Cerberus that the investment firm has such lofty ambitions for its new prize. The firm has a reputation for swooping in on distressed companies and aggressively cleaning house for possible resale.

It also has a penchant for secrecy, preferring to operate in relative anonymity as it cut deals in recent years for the likes of supermarket chain Albertson's Inc., Mervyns department stores and car-rental giants National and Alamo.

The Cerberus Web site (cerberuscapital.com) offers scant information about the firm and its activities, saying that "Cerberus holds controlling or significant minority interests in companies around the world. In aggregate, these companies currently generate over $60 billion in annual revenues."

As for its philosophy, the site says Cerberus seeks to "invest in undervalued companies and their people, and help them to realize their potential."

A Cerberus spokesman declined to comment on the Chrysler deal.

David Cole, chairman of the Center for Automotive Research in Michigan, said Cerberus went after Chrysler for one reason and one reason only. "They smell assets that are cheap," he said. "They are not here out of benevolence, you can be sure of that."

Cole and other auto-industry watchers say Cerberus will focus primarily on hacking away at Chrysler's expenses and then, the heavy lifting out of the way, probably offer the company to some other buyer with longer-term goals.

Kim Korth, president of IRN Inc., a Michigan auto-industry consulting firm, said it's pretty likely that Chrysler will change hands again during the next few years.

"It all depends on how quickly Cerberus can change the cost structure," she said. "It's a classic turnaround situation. But the big difference with Chrysler is that they have significant product in the pipeline."

Korth's guess is that Chrysler will continue focusing on what Detroit does so well -- selling larger-sized vehicles that Americans crave -- and will leave the cutting-edge stuff to the Japanese.

And after Cerberus cleans house, she believes the most likely buyer will be another overseas company. "It could be someone from Asia this time," Korth said. "Maybe someone from India."

If so, hopefully Chrysler's next owner will actually see the company as having a future -- and the vision to take it there.


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