The Chrysler-Fiat reversal of Fortune

May 2, 2013, 2:22 PM UTC

In case you missed it, Chrysler LLC reported its 37th consecutive month of year-over-year sales gains this week. The automakers’ high-profit Ram pickups are winners, and Chrysler has added market share. It was the best April Chrysler has enjoyed since 2007.

The year 2007 resonates in Chrysler history for another reason: It was on May 14 that DaimlerChrysler publicly conceded the failure of its cross-ocean , cross-cultural merger by announcing the sale of 80.1% of the Chrysler Group to Cerberus Capital Management for $7.4 billion. At the time of the sale, Chrysler was worth only a fraction of its pre-merger 1998 price, and its fortunes only declined from there. Lehman Brothers went bankrupt a year later, and in the ensuing downturn the government was forced to pump billions of dollars into Chrysler in 2008 and 2009 before it filed for Chapter 11 bankruptcy reorganization on April 30, 2009.

The company nearly died on the operating table. As Steven Rattner related in his book Overhaul, the question of what to do about Chrysler was debated at nearly every meeting of the government’s auto task force. After a close vote among economic advisers, the decision about its survival went to the Oval Office, where President Obama decided that Chrysler should be saved. “It was better to invest $6 billion for a meaningful chance that Chrysler would survive than to invest several billion dollars in its funeral,” was the rationale, according to Rattner. Further cliff-hanging negotiations were required before the government agreed to pass 20% of Chrysler along with operating control along to Fiat, in exchange for Fiat’s technology and management expertise.

Whatever contributions Fiat technology has made to Chrysler are hard to measure, but the impact of Fiat’s management has been undeniable. Chrysler sales, which had fallen from 2.3 million in 2005 to only 931,402 in 2009, have rebounded smartly and reached 1.7 million last year. Under previous owners Daimler and Cerberus, Chrysler had been starved of investment and left with the weakest product line in the industry. CEO Sergio Marchionne smartly identified where he could most upgrade Chrysler’s cars and trucks with the fewest resources and set Chrysler on its 37-month run. Though its passenger car lineup still lags the industry’s best, Chrysler is now fully competitive in pickups and sport utility vehicles.

In other words, instead of being liquidated at the cost of some 300,000 jobs, Chrysler is now a viable company, thanks to Marchionne and Fiat — which makes it all the more difficult to comprehend the heat of the dispute now consuming Detroit. Where once Fiat rescued Chrysler, now Chrysler is in a position to rescue Fiat, and it drives some people nuts.

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That idea may have seemed far-fetched in 2009 but it is reality today, and Chrysler won’t be the only company helping out a European carmaker. General Motors’ (GM) and Fords’ (F) North American operations are supporting Opel and Ford of Europe respectively. Europe’s financial crisis combined with its aging demographic and the intransigence of labor unions in the face of overdue cuts in factory capacity have pushed even mighty Volkswagen into a tailspin.

With Europe deep in recession, Fiat, never a strong player to begin with, is drowning, and Chrysler is in the position of extending a life preserver. Fiat now owns 58.5% of Chrysler, and Marchionne wants to buy the remaining 41.5%. Owning 100% of Chrysler would allow him, under his agreement with the government, to finally integrate the two companies on one balance sheet. Chrysler is banking cash while Fiat is burning it, so Chrysler’s cash would, in effect, be used to prop up Fiat.

To complicate matters, and to further inflame Detroit passions, the remaining 41.5% that Marchionne wants to buy is owned by a UAW voluntary employee beneficiary association trust (VEBA). The stock was given to the UAW as part of the 2009 government bailout to pay for retiree health care expenses. But there is a difference of opinion about the value of those shares. The UAW trust says they are worth $11.5 billion. Marchionne wants to pay quite a bit less: $4.68 billion.

The dispute has stirred emotions in Motown, where labor unionists fear that a settlement tilted toward Fiat will suck money out of their health care benefits. Indeed, the whole notion of American dollars bailing out an Italian company rankles some. Wrote popular blogger Peter De Lorenzo this week: “Gifted Chrysler by the U.S. Government and funded on the backs of you and me, the U.S. taxpayer, Marchionne is now using Chrysler to sustain that miserable excuse of a car company called Fiat.”

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What’s been forgotten in the controversy is that it wasn’t only Fiat that got a sweet deal in the Chrysler bankruptcy; the UAW did too. Here’s how it went: According to one analysis, Chrysler’s first-line secured creditors got only 29 cents on the dollar; its second-line secured creditors got nothing. Neither did its suppliers By law, the UAW, which figured it was owed $8.8 billion for the VEBA, should have gotten stiffed too. Its claim came after all the secured creditors. But Rattner’s team didn’t see it that way. Instead it awarded the VEBA 55% of the shares in the reorganized Chrysler, along with a note for $4.6 billion.

Rattner points out that the stock was held by the VEBA and not the union, and carried no voting rights. He goes on: “Most of the equity was unspoken for. We calculated that the UAW was taking a significant cut in its health care claim, at least 40%. Yes, the UAW accepted pain and risk.”

A judge in Delaware will decide whose numbers to use: Marchionne’s or the union, or something in between. Neither side should be aggrieved; they are both well ahead of where they would have been if the chips had fallen just a bit differently.

A ruling that falls closer to the union’s claim would put it out of reach of Fiat’s ability to finance. Still, you have to put your money on Marchionne. Having been trained as an accountant, he knows his numbers. He has proved on numerous occasions that he is a fearsome negotiator. And he seems determined to create an automotive enterprise with the scale to compete in the 21st century.

As he told analysts and reporters this week, “Whether we’re the sixth or the largest car company in the world as a result of all this, it really does not matter. We are not running to league tables here. The only thing that does matter is that we do have within the combined entity, sufficient mass and sufficient geographic coverage to call ourselves a global car company.”

Here’s betting he will.

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