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Cerberus wins bid for Chrysler

Announcement of deal could come today

Bill Vlasic and Josee Valcourt / The Detroit News

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The Chrysler Group headquarters in Auburn Hills soon could belong to Cerberus Capital Management. DaimlerChrysler is said to have chosen the private-equity firm over bids by rivals Blackstone Group and Magna International. See full image
What we know

The deal

Terms were not clear Sunday, but DCX is expected to retain a stake in Chrysler and transfer responsibility for its huge health care and pension costs to the new, privately owned Chrysler.

The key players

Dieter Zetsche: The former Chrysler CEO stunned the auto industry in February when he said all options were on the table for Chrysler, including a sale.

Tom LaSorda: After more than 20 years at GM, LaSorda moved to Chrysler in 2000 and replaced Zetsche as CEO in September 2005. He is expected to remain Chrysler's top executive.

Wolfgang Bernhard: Chrysler's former chief operating officer is expected to get a senior board position in Chrysler's new corporate structure.

Ron Gettelfinger: Cerberus is likely to face strong opposition from the UAW president, who has criticized private equity firms for "stripping and flipping" the assets of troubled companies.

Source: Detroit News research
Special Reports

Project X

Feb. 5, 2007

* Chrysler's secret comeback plan
* Chrysler gets tutor on revival
* Region likely to feel pain and gain

Fix it or Else

Feb. 15, 2007

* DCX TO Chrysler: Fix it or else
* 5,500 Mich. Jobs to be lost
* Salaried await their fate in 'solemn' Auburn Hills
* UAW pledges to protect and fight for jobs
* Will 13 new models this year lift ailing Chrysler?
* Wall Street hails potential sale
* Zetsche letter to staff outlines revival plan
* Weakness invites range of suitors
* Daniel Howes: Company's future? All bets off

Book Excerpt: Taken for a Ride

A special book excerpt published in May of 2000 in The Detroit News

From the book TAKEN FOR A RIDE: How Daimler-Benz Drove Off With Chrysler by Bill Vlasic and Bradley A. Stertz. Copyright 2000 by Bill Vlasic and Bradley A. Stertz. Reprinted by permission of William Morrow & Co., an Imprint of HarperCollins Publishers.

* How disputes exploded inside DaimlerChrysler
* Why DCX honeymoon soured
* How Daimler snared an American icon
* Secretive talks nearly unraveled
* Schrempp takes over as DCX driver

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* The deal makers
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Chrysler

The Dodge Caliber is one of Chrysler's latest models. Even with the new models, Chrysler fell short of shareholders' expectations. See full image

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Cerberus Capital Management has won an intense bidding war to buy DaimlerChrysler AG's Chrysler Group in what would be a landmark acquisition of a major automaker by a private-equity firm, according to people close to the sale process.

The deal follows marathon negotiations between New York-based Cerberus and DaimlerChrysler and is expected to be formally announced as soon as today.

DaimlerChrysler is said to have chosen Cerberus over bids by rival private-equity giant Blackstone Group and Canadian auto supplier Magna International Inc.

The sale agreement with Cerberus is expected to be contingent on final terms to be negotiated with DaimlerChrysler. No sale price was immediately known.

The deal marks the bittersweet end of the tumultuous 9-year-old marriage of German automaker Daimler-Benz AG and the former Chrysler Corp., formerly the No. 3 U.S. automaker.

The sale to Cerberus also christens a new era in the aggressive push by private investors into the traditional domestic auto industry.

Officials at DaimlerChrysler, Chrysler and Cerberus declined to comment Sunday on the pending announcement.

However, people close to the process said Chrysler CEO Tom LaSorda will remain as the top executive of the Auburn Hills-based automaker.

Cerberus executive Wolfgang Bernhard, Chrysler's onetime chief operating officer, will likely have a senior board position in the automaker's new corporate structure.

Bernhard, who was instrumental in Chrysler's last corporate comeback, was closely involved in the final stages of the talks between Cerberus and DaimlerChrysler.

By picking Cerberus, DaimlerChrysler is betting that a closely held, private-investment firm can turn around struggling Chrysler, which lost $1.5 billion last year before accounting changes.

People close to the sale said DaimlerChrysler may retain a minority stake in Chrysler for some time, and the two sides would continue joint vehicle programs.

While terms of the sale agreement were unclear Sunday, DaimlerChrysler is expected to transfer responsibility for its huge health care and pension costs to the new privately owned Chrysler.

Auto analysts estimate the long-term health care and pension obligations to Chrysler's unionized workers at about $19 billion.

The sale of Chrysler is an epic event in the global auto industry, and as stunning a development as the groundbreaking merger of Daimler-Benz and Chrysler was in 1998.

Not so happily ever after

The combination of Daimler-Benz's luxury vehicles and Chrysler's mass-market products was supposed to revolutionize the industry and pave the way for more international alliances.

But DaimlerChrysler was never able to hit on all cylinders. Chrysler in particular rode a roller coaster of profits and losses as it lost share in the hyper-competitive U.S. market.

Last fall, DaimlerChrysler shareholders began another concerted effort to pressure the company's management and supervisory board to sell Chrysler.

DaimlerChrysler CEO Dieter Zetsche essentially put Chrysler up for sale in mid-February, even as he stressed that "all options" were open for the U.S. division.

In fact, Zetsche had been in talks in late 2006 with General Motors Corp. about a Chrysler deal.

When GM's offer fell short of DaimlerChrysler's expectations, the German automaker hired investment banker J.P. Morgan Chase to find other potential buyers.

Union will have some say

Three bidders qualified to make offers -- Cerberus, Magna and a private-equity team of Blackstone and Centerbridge Partners.

Billionaire investor Kirk Kerkorian, who unsuccessfully tried to buy Chrysler in 1995, put in his own cash offer of $4.5 billion. But DaimlerChrysler froze Kerkorian out of the bidding process.

Magna was considered by some analysts as a strong contender in the bidding, given its close business ties as a supplier to DaimlerChrysler.

But Cerberus emerged as the lead candidate in the past two weeks, according to people close to the sale process.

The selection of Cerberus could draw fire from the United Auto Workers, whose president, Ron Gettelfinger, has publicly criticized how private-equity firms downsize troubled companies.

Cerberus -- named after the three-headed dog that guarded the gates of hell in Greek mythology -- last month dropped out of a consortium to buy the bankrupt supplier Delphi Corp.

The firm was said to have crossed swords with the UAW over proposed wage cuts at Delphi.

"It's fine from a value perspective," analyst Brad Rubin of investment bank BNP Paribas said of a Cerberus purchase of Chrysler. "But the union, which it shouldn't have a say, will probably have a say. It's been very clear that the union has been highly skeptical of Cerberus or any private-equity firm for that matter."

He said the union fears a private-equity firm would eventually slash jobs to cut costs, "which is not untrue."

"It's going to be a big pill for the union to swallow and it'll certainly make for an interesting next few months," Rubin said.

Taking on too much?

With its buyout of Chrysler, Cerberus will become a major force in the domestic auto industry.

The firm earlier this year took 51 percent ownership of GMAC Financial Services, GM's former auto financing unit.

Cerberus is expected to fold Chrysler's financing arm into GMAC to create a powerhouse auto lending operation.

David Healy, an analyst with Burnham Investment Research, said it will be better for Chrysler to be separated from DaimlerChrysler. But it will be traumatic for the company and for union members wondering if Cerberus will back Chrysler's long-term pension and health care obligations.

"It's better unwound," Healy said. "But it's traumatic for Chrysler and particularly the union members who are wondering whether there will be backing for the $18 billion in pension and unfunded liability. In other words, does Cerberus have deep enough pockets to satisfy the union to cover their benefits?"

He also wonders if Cerberus is taking on too much with Chrysler.

"This is by far the biggest acquisition that Cerberus has made," Healy said. "The question I have is have they bitten off more than they can chew?"