In Deal, a Test for the U.A.W.
AUBURN HILLS, Mich., May 14 — Can private equity investors fix Chrysler
for good, and can they avoid a confrontation with the United Automobile
These are the most pressing questions to arise from the deal announced
Monday for Cerberus Capital Management, which specializes in
restructuring troubled companies, to pay a total of $7.4 billion to take
control of Chrysler, with most of that money to be invested in the newly
By unwinding a nine-year-old merger between Chrysler and Daimler-Benz of
Germany, Cerberus is also taking on Chrysler’s $18 billion obligation
for health care and pensions for employees and retirees.
Any efforts to sharply reduce those perks — which Chrysler can afford
but says represent a cost burden of $1,500 a vehicle — will probably put
it at odds with the U.A.W.
The issue will take on added importance in two months, when the union
and Detroit automakers open talks on a new national contract. The
union’s position on Chrysler may influence talks with General Motors and
the Ford Motor Company, with the outcome representing the latest chapter
in the wholesale restructuring of the American auto industry.
For now, the U.A.W. is supporting the deal. Its stance represents a
reversal from only a month ago, when Ron Gettelfinger, the union
president, warned that an equity player might “strip and flip” Chrysler,
selling off its most valuable parts for a quick profit.
But based on what the union was told of Cerberus’s plans, Mr.
Gettelfinger said Monday that the U.A.W. was “confident enough to say
that we support this transaction.”
That support may dwindle as the company and the union start discussing
specifics. The most obvious way for Cerberus to make money off its
investment is to cut costs — especially by reducing the benefits that
workers hold sacred, including medical benefits for workers and their
immediate families for life, with only modest co-payments or deductibles.
“They’re going to want us to give something up,” Tim Preston, 50, a
tradesman at Chrysler’s Jefferson Avenue North assembly plant in
Detroit, said Monday.
Chrysler, in fact, has already tried. Last year, the U.A.W. refused to
give Chrysler the same concessions on medical costs that it granted G.M.
and Ford, which it deemed in far worse shape.
The union also refused to grant deep wage and benefit cuts to the Delphi
Corporation, G.M.’s former parts subsidiary, which had reached agreement
to sell itself to Cerberus if a labor deal could be reached. Company and
union leaders say those talks are not dead, however.
Except for the early 1980s, when the union granted concessions at all
three car companies, labor talks have been fruitful for the U.A.W. in
recent decades, as it has continued to make gains in wages and benefits
even as tens of thousands of jobs have been eliminated.
That trend was broken in the last couple of years when the union agreed
to buyouts and retirement incentives for workers and agreed to
concessions at G.M. and Ford.
By showing their support Monday for the Cerberus deal, U.A.W. leaders
may have been trying to set the tricky groundwork of making the prospect
of concessions palatable to union members as a way to keep Chrysler
“It does promise some creative and maybe not-business-as-usual
solutions,” said John Paul MacDuffie, co-director of the International
Motor Vehicle Program at the Massachusetts Institute of Technology.
No requests have been made of the union yet, but both Mr. Gettelfinger
and senior Chrysler executives say there seems to be a meeting of minds.
“We have been led to believe that they are very concerned about the
American automobile industry,” said Mr. Gettelfinger, who spent four
hours with Chrysler executives this weekend being briefed.
His reaction was clearly a relief to the Cerberus chairman, John W.
Snow, the former Treasury secretary, who joined DaimlerChrysler
officials in Stuttgart, Germany, at a news conference on Monday.
“We’re going to work to make sure this company succeeds, and as the
company succeeds, it will maximize opportunities for workers,” Mr. Snow
said. “Our objective is a successful Chrysler and a successful Chrysler
Some workers, however, were skeptical. “It makes me real nervous,” said
Anthony Watson, 36, a chassis assembly worker at Chrysler’s truck plant
in Warren, Mich.
Richard Burns, 39, an assembly line worker at the Warren plant, just
north of Detroit, said he and many of his colleagues did not know much
about Cerberus. “We’re scared they’re going to break us up,” he said.
Cerberus officials insisted Monday that was not the case. Under the
complicated deal, Cerberus will take an 80.1 percent stake in the new
company, to be known as Chrysler Holding. Of the $7.4 billion, Cerberus
agreed to invest $5 billion in the new Chrysler and $1.05 billion in
Chrysler’s financial arm. The remaining $1.35 billion will go to the
former German parent company.
In turn, DaimlerChrysler has agreed to lend Chrysler Holding $400
million and will absorb $1.6 billion in costs related to a restructuring
program under way at Chrysler, which said in February that it would cut
13,000 jobs and close all or part of four factories. Investors in
DaimlerChrysler showed their support for the deal Monday by bidding up
the shares $2.12, to $84.12. The Cerberus deal will have little impact
on shareholders of the German parent company, other than the financial
impact of shedding Chrysler.
All told, DaimlerChrysler will spend $677 million in cash on the
transaction. Daimler-Benz paid $36 billion for Chrysler in 1998 in what
was portrayed as a merger of equals but ended up being a German takeover
of the American company.
In hindsight, the merger’s early days were its best. At the time,
Chrysler was rolling in profit, from the popularity of its big Jeeps and
minivans, while Mercedes-Benz was enjoying a comeback for its cars,
especially the E-class sedan and the M-class, its first S.U.V.
The architects of that earlier merger, Jürgen E. Schrempp, the former
chief executive at Daimler-Benz, and Robert J. Eaton, who ran Chrysler,
envisioned a company that married the mass-market success of Chrysler
and the luxury appeal of Mercedes. But Chrysler did not consistently
deliver on its promise.
Indeed, for the last 30 years, Chrysler has acted like what might be
described as a split-personality car company, with wide and fast swings
from highs to lows.
The same big vehicles, for example, that generated big profits in the
late 1990s put Chrysler out of step with changing consumer tastes when
gas prices soared.
Last summer, as many as 100,000 unsold Chryslers piled up on storage
lots, a big factor in Chrysler’s $1.5 billion loss for 2006. Last year,
it fell to fourth place in the American market, behind Toyota.
In February, Mr. Schrempp’s successor, Dieter Zetsche, who ran Chrysler
from 2000 to 2005, said the company would eliminate 13,000 jobs, or 16
percent of the total staff, and close all or part of four plants in its
second restructuring in seven years.
Mr. Zetsche also put Chrysler up for sale, attracting a series of
bidders, including Cerberus as well as two other equity players, the
Blackstone Group and Centerbridge Partners.
The billionaire Kirk Kerkorian, who had often tangled with Chrysler
management, also put in a bid, as did Magna International, the Canadian
auto parts supplier.
The Cerberus deal represents a sea change in Detroit, where there has
not been a major privately held company in over half a century (the Ford
Motor Company, in which the Ford family still has a controlling stake,
went public in 1956; G.M. has been public for nearly a century.)
As a private company, Chrysler may be able to better explore, with less
public scrutiny, ways to lower health care costs with its workers.
One idea may come from the Goodyear Tire and Rubber Company, which is
giving the United Steelworkers union $1 billion to take over a health
care plan covering 30,000 retired workers.
Executives from all of Detroit’s companies have studied the plan, which
would probably cost the auto industry tens of billions of dollars to
carry out in the United States. But if the U.A.W. did agree, it would
mean removing the liability from the car companies.
Whatever the answer, many industry experts predict that Chrysler will
find some way to resurrect itself.
“This history of coming back from near death over and over — the nine
lives of Chrysler — does have a powerful hold within the company, and
with their suppliers and with the union workers,” Professor MacDuffie said.