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, which is taking a huge risk by agreeing to take on billions of dollars in pension and retiree health care costs at Chrysler.
Chaired by former U.S. Treasury Secretary John W. Snow, 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. But United Auto Workers President Ron Gettelfinger on Monday called the sale to Cerberus the best choice.
Daimler Chrysler AG, which paid $36 billion to take over Chrysler almost nine years ago, 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're confident that we've found the solution that will create the greatest overall value — both for Daimler and Chrysler," said Zetsche, who oversaw Chrysler before becoming DaimlerChrysler CEO in 2006. "With this transaction, we have created the right conditions for a new start for Chrysler and Daimler."
Shareholders reacted positively, sending DaimlerChrysler's shares up more than 7 percent after the deal was announced, before settling back at 64.04 euros ($86.36) for a gain of 5.6 percent.
Zetsche added that the two companies would still work together, particularly on existing conventional and alternative drive systems, purchasing, sales and financial services outside North America.
"We very much look forward to our continued cooperation as business partners, as we want to continue to reap the mutual benefits of working together," Zetsche said in a statement. "That's one of the reasons why we're retaining a 19.9 percent equity position in Chrysler."
DaimlerChrysler said the deal is likely to be complete by the third quarter and that it would reduce its overall profit by as much as $5.4 billion for 2007.
Shareholders must approve changing the 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.
"The transaction with Cerberus is in the best interests of our UAW members, the Chrysler Group and Daimler. We are pleased that this decision has been made," he said.
That was a shift from earlier this year, when Gettelfinger warned that a private equity buyer would "strip and flip" the company by selling it off in pieces.
On Monday, he said he was told by Zetsche and Chrysler President Tom LaSorda that keeping it part of the wider company was no longer an option.
"Furthermore the process of selecting the preferred investor for the Chrysler Group was fully explained," Gettelfinger said. "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."
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.
Analysts said last week that Magna International founder and Chairman Frank Stronach was the likely leading bidder for Chrysler. Billionaire investor Kirk Kerkorian, who tried to take control of Chrysler in the 1990s, also has said he would make a bid, but it was apparently spurned.
As the company's stock price continued to disappoint, Zetsche announced Feb. 14 that all options were open for Chrysler, which lost $1.5 billion last year and is undergoing a restructuring plan that will eventually shed 13,000 jobs.
Snow said the deal was a sign of faith in Chrysler, an iconic American brand and third-largest U.S. carmaker behind General Motors Corp. and Ford Motor Co.
"We welcome Chrysler into the Cerberus family of companies and believe Cerberus will be a good home for Chrysler," Snow said in a statement. "Most importantly, we believe in Chrysler."
Cerberus also has former Vice President Dan Quayle an adviser. David W. Thursfield, who used to run Ford in Europe, is a senior member of the operations team in Cerberus' automotive and industrial practice. And Wolfgang Bernhard, former Chrysler chief operating officer, is a newcomer to Cerberus.
Last year, GM sold a majority stake in its General Motors Acceptance Corp. financing arm to a consortium of investors led by Cerberus for about $14 billion. Analysts had said buying a big stake in Chrysler would let Cerberus combine GMAC operations with Chrysler Financial.
In December, Cerberus was part of a consortium of investors that said it would invest $3.4 billion in the struggling auto parts giant Delphi Corp. in exchange for new shares of Delphi stock as it emerged from Chapter 11 bankruptcy protection.