Why Buy Chrysler?

Chrysler would be the first major automaker to become a private company. The big question is what will Cerberus do with the ailing car maker? Colin Blaydon, professor at Dartmouth's Tuck School of Business, talks about the deal.

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STEVE INSKEEP, host:

Cerberus, the private equity firm that's buying Chrysler, has been trying to make an inroad into the auto industry for years. A company which buys troubled corporate castoffs now appears to be assembling one of the world's biggest automotive companies. It's put together a group of auto-related assets, including General Motors's former financing unit and the company that owns the Alamo and National Car Rental chains. Which raises the question whether Cerberus can save Chrysler.

We put that question to Colin Blaydon, who teaches at the Tuck School of Business at Dartmouth.

Professor COLIN BLAYDON (Dartmouth): What they are good at doing is really transforming companies. That's what they're going to be looking to do here. But it's very different from the big private equity deals we've been seeing recently.

INSKEEP: How so?

Prof. BLAYDON: Well, the reason we've gotten to know these firms, and they've been in the news so much lately, is because they have been able to raise so much money and buy very big companies. There is not a lot of money being put on the table for Chrysler.

INSKEEP: What can a private equity firm do with Chrysler or perhaps to Chrysler that Daimler was unable to do with them?

Prof. BLAYDON: One thing we have been seeing in the last few years is that the private equity model seems to be very effective. And by that I mean take a company, have a very focused board of directors that can make tough decisions and pay close attention because it's their investment money in it, and then put in place an incentive structure for the management team and the workers that really get them focused and have a big stake in the transformation of the company. That's something the big auto companies have not done.

INSKEEP: Can I just ask one more question? In and among all these efforts to cut costs and restructure the company and prepare possibly for going public again at some point after things have been restructured, do you think that the new executive team is going to have time to think about, well, making and selling better cars?

Prof. BLAYDON: They're going to have to. Because if they do not create value that's recognized in the marketplace, they're going to fail. There is a broad misunderstanding about these private equity firms that, you know, they strip assets and steal away in the middle of the night. They can't make money by doing that, and particularly they can't make money doing that with a company like Chrysler.

INSKEEP: We've been listening to Colin Blaydon. He teaches at the Tuck School of Business at Dartmouth. Thanks very much.

Prof. BLAYDON: Thank you.

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Q&A: Under the Hood of the Chrysler Deal

A Chrysler Jeep sits at a Chrysler dealership May 14, 2007, in Troy, Michigan i i

hide captionA Chrysler Jeep sits at a Chrysler dealership May 14, 2007, in Troy, Mich.

Bill Pugliano/Getty Images
A Chrysler Jeep sits at a Chrysler dealership May 14, 2007, in Troy, Michigan

A Chrysler Jeep sits at a Chrysler dealership May 14, 2007, in Troy, Mich.

Bill Pugliano/Getty Images

Germany-based DaimlerChrysler will soon lose the second half of its name. The company announced Monday that it is selling 80 percent of the Chrysler Group to a private equity fund for $7.4 billion. The new owner, Cerberus Capital Management, inherits an automobile company that is losing money and laying off workers. The deal essentially reverses a much-touted 1998 merger of the two automakers. Here, a look under the hood at the sale:

What is Cerberus? I've never heard of it.

It is a private-equity firm — named after the three-headed dog that guarded the gates of hell in Greek mythology. The firm, founded in 1992, currently owns about 50 companies, ranging from Air Canada to Formica Corp. Of late, it has taken an interest in the auto industry. It owns the car-rental firms National and Alamo and has a controlling interest in General Motors' financing arm. Former Treasury Secretary John Snow is Cerberus' chairman.

Is this the biggest takeover by a private-equity firm?

No, but it is certainly one of the most high profile. For the first time, a U.S. automaker — and American icon — is in the hands of a private-equity firm, not accountable to shareholders.

What happened to the much-heralded merger between Daimler-Benz and Chrysler a decade ago?

It never stuck. At the time, it was called a "merger of equals" and a "marriage made in heaven." As it turns out, it was a less-than-ideal union —- with Chrysler's profit line after the merger resembling the path of a roller-coaster. Dieter Zetsche, the chief executive of DaimlerChrysler, admitted as much at a news conference Monday in Germany. "We obviously overestimated the potential of synergies," he said.

Critics of the merger say it failed, in part, because Daimler was reluctant to share its high-end technology with the more down-market Chrysler products. "Daimler didn't want their Mercedes owners looking under the hood of their car and seeing the same thing under the hood of a Dodge," says David Healy, an analyst with Burnham Securities.

Under pressure from angry shareholders, Daimler was eager to unload Chrysler — even at a fire-sale price — and rid itself of what had become a financial albatross. The way the deal is structured, Daimler is actually paying to unload Chrysler.

Will Daimler play any role in Chrysler's future?

Yes. Daimler will retain a nearly 20 percent share in the new Chrysler, and some joint research projects will continue.

How poorly is Chrysler doing as a company?

Very poorly. It posted an operating loss of $1.5 billion last year, closed one plant and recently announced 13,000 layoffs. It is saddled with high labor costs, dwindling sales and an excessive number of dealerships. And Chrysler, like other U.S. automakers, has been slow to introduce fuel-efficient hybrid cars, like the popular Toyota Prius.

What does the deal mean for Chrysler's 80,000 employees?

That's not clear. Traditionally, private-equity firms that buy a company like Chrysler reduce costs drastically — often through layoffs — then sell the company at a profit. That's why Chrysler President Tom LaSorda was quick to reassure employees by saying that Cerberus has "a long-term commitment to Chrysler's growth and success." Cerberus Chairman John Snow argues that a private firm, free of shareholders hunger for quarterly profits, can actually take a more long-term view. "We don't think about the next quarter. We don't think about what analysts have to say about us," he said. Many analysts, though, say future layoffs at Chrysler are inevitable, given the amount of cash the company is hemorrhaging.

How do the labor unions feel about the sale?

They support it, which is surprising because just a few weeks ago, the head of the biggest union, the United Auto Workers, publicly opposed the sale of Chrysler to a private-equity firm. UAW chief Ron Gettelfinger said he feared such a firm would "strip and flip" the company to turn a quick profit. It's not clear why he had a change of heart. The deal, though, may represent the best of several bad options for the company — and the union. On Monday, Gettlefinger said the union had received some "commitments" from Cerberus, but he didn't specify what they were. In any event, the tough decisions won't be made until this summer, when management and the union begin negotiating a new four-year contract.

Who absorbs Chrysler's health care and pension liabilities?

Cerberus does. And they are costly: around $18 billion or more, according to some estimates.

What does the deal mean for Chrysler consumers?

Not much, at least in the short term. Warranties, for instance, are protected under law, even if the company is sold. In the medium term, the new owners may launch some innovative new models in hopes of winning back market share.

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