Before I begin today’s blog, I should tell you that I am a real Chrysler fan. My car rental agency only handled their vehicles. Chrysler was the firm with the best engineering in the business; maybe, not the best designs always, but… (I also stopped being an exclusive Chrysler guy when Mercedes Benz took them over.) And, now, as you can see from the pictures, Chrysler is back in the news.
It’s come back from the dead- again. The last time is when Lee Iaccoca was involved. Now, it’s since TARP. And, if you recall, during the TARP process, the Union of Auto Workers (UAW) obtained a significant portion of ownership in the firm (41.5%) in return for reducing wages and benefits in the company. (Actually, the stock is owned by the Retiree Medical Benefits Trust- RMBT .)
Now, the union wants to cash in. They have been negotiation with Sergio Marchionne, the CEO of Fiat, the other owner of the firm. Or, at least, it looks like they have been negotiating. Marchionne has offered the union about $ 1.5 billion for their stock; the union expects $ 4.75 billion. That’s a lot of difference. Analysts believe the union holdings are worth somewhere between $ 4 and $ 4.5 billion.
This is exactly why the union finally decided to sell their stock to the public. To raise those funds. Which will destroy the dream of Marchionne in owning all of Chrysler. And, like Mercedes, which stripped technology and knowledge from Chrysler during their ownership, Marchionne wants the Chrysler engineering and money to keep his company (Fiat) afloat. Oh, I don’t think he wants to kill Chrysler, but he desperately wants its cash hoard and cash flow.
He also knows that the Fiat 500 (and newer 500L) would be nowhere in the US, without the Chrysler affiliation. Next on the list is to bring back the Alfa Romeo roadster to the US in 2014. (You may recall that Chrysler had an affiliation with Maserati – also part of Fiat- in the 1990’s; that’s how Chrysler offered its wonderful two seater sport vehicle. Fiat is using the Chrysler’s technology- specifically the Grand Cherokee- to come up with the Maserati Levante in Europe.) These sales are critical- to keep Fiat running at capacity- or its losses will be even more huge.
If the stock is sold to the public, Marchionne is stymied. It’s European operations are moribund- and it cannot expand into the Chinese (or even the US market) without Chrysler and its money. Right now, 1/2 the annual net profits from Chrysler accrue to Fiat; the other half goes the the RMBT.)
How important is that money to Fiat? Consider this- Fiat received some $ 800 million from Chrysler. And, Fiat’s profits were $ 435 million. (Yes, that does mean that Fiat, sans Chrysler, lost some $ 350 million.)
RMBT needs to sell the stock because too much of its assets are illiquid- the 41.5% of Chrysler it owns (on the books for $ 2.7 billion), and a $ 4.4 billion note (at least on the books, it is) that pays 9% interest per year (until 2023.) The union only has $ 8.7 billion in assets, including these two big ticket items. Those funds are necessary to supply the benefits for some 120K retirees- currently running close to $ 700 million. (And, that does mean they have about 4 years of cash left to pay the benefits.) They are asking their retirees to cut their benefits, too.
So, it’s my supposition that this brinkmanship is akin to that occuring in our nation’s capital. The union knows the stock is worth at least $ 3.5 billion and Fiat is lowballing them. If they sell the anticipated 16.6% (they may actually sell more, too) of Chrysler via an IPO , they will be better able to fund their retirement needs- which is the driving force in this effort; and Fiat will never be able to control Chrysler they want, without spending more money- a lot more than the union will obtain from the stock offering.
(You should know this is the kind of analysis we provide our clients about their firms- and their competitors. Don’t you think this kind of intelligence can help you grow your firm? Give us a call- today!)
Fascinating analysis, Roy. I’ve always liked Chryslers, too.
Amy recently posted..Hoop house poly-pulling part 1: It takes a village
Thanks, Amy…
Other that you live in the Midwest, are female, and farm, we are a lot alike :-)….
Fascinating! I just bought a Fiat 500L. My husband works in the automotive industry so we were able to get a tier 1 supplier discount because of its affiliation with Chrysler. The behind the scenes analysis is appreciated.
Wendy (the Local Cook) recently posted..ArtPrize: A Celebration of Art Throughout My City
Glad to oblige, Wendy…
Too many “news” papers don’t provide the whole story. (It probably has a lot to do with the fact that they don’t understand business well enough…)
Well written. I could actually follow along and I have no head for such things. Sounds to me like the retirees and the union will be far better off to leave old Sergio in the lurch. Let him eat cake… or tiramisu…
I am glad that I made the explanation clear enough to help you, Alessa. There is no point in telling a story that no one gets.
And, I vote for cake…Drake’s Cakes, which are coming back to the marketplace as we speak!!!!
Very interesting post.. My dad raised 7 children via the auto factories of Detroit and I remember when Mr. Iaccoca came in and “saved the day” for Chrysler (my dad was a GM man.) Whatever the outcome I hope that the retirees actually will benefit. Four years is not a long time..
Thanks for breaking this down for us. 🙂
(I saw you liked my post in the UBC on FB so I *had* to come over and check you out! And I’m so glad I did!)
Magical Mystical Mimi recently posted..IRRATIONAL FEAR #3,679,566 – Tis The Season… – UBS 2013
Yes, Mimi, four years is NOT a long time. (Of course, that is twenty three lifetimes the way Congress seems to act- but businesses have no such luxury…)
Glad to hear about those who made their way thanks to US manufacturing. Hats off to your dad!
Wow – such an insightful evaluation. I’m intrigued by your comparison of Chrysler/Fiat and Washington DC. Certainly something to ponder over! I appreciate the new awareness.
Lisa Mallis recently posted..Ultimate Blog Challenge – Why I’m Participating Again
Thanks for your visit and comment, Lisa. I appreciate it.
My goal was to make sure folks know what is really going on, since the news just was reporting they were going public and that made no sense based upon Fiat’s stated comments.
Here is a fine riddle for you: How is a car company like the federal government? Roy, you are the only man who can answer this. Your neural synapses are firing on all cylinders.
Ann Mullen recently posted..[Video] Very Young “In Home” Caregivers Fill the Void
I hope it’s an 8 cylinder and none of those wimpy 4 cylinder junk heaps the car vendors are trying to push on us, Ann!
Okay i got to say that you make some interesting points but you make it look like Fiat needs Chrysler to survive which in all honesty is the exact opposite. Your profit ratings for Fiat does not account for the immense cash cow known as Ferrari which Fiat owns. Also inregards to Chrysler technology being brilliant, i will say i disagree. What has been the breakthrough technology, in design, or engineering that Chrysler has had in the past 20 years? Infact, their products were so bad that when Mercedes Benz adopted their manufacturing processes, they became one of the most unreliable cars in the UK with the Mercedes Benz SL scoring last in the SUV table.
Fiat on the other hand is a company with a portfolio of products that have innovated in many ways. The Alfa Romeo 4C as a recent example is the first mass produced car to have a carbon tub.
In regards to the platform sharing, it just makes perfect sense for them to use the RWD platform (developed under Mercedes benz) of Chrysler 300 for Alfa Romeo and Maserati because it will improve economies of scale. Chrysler will benefit from Fiats superior R&D spend, their knowledge into small cars which will help Chrysler in the European market and also their Diesel and alternative energy power plants which Chrysler does not have.
Oh, there’s no way Fiat has a good profit position. It’s European business has been a shambles for way too long.
And, to say Ferrari is a cash cow??? Really??? If the entire sales price of the car were profit (which is clearly NOT the case), then the “cash” from its business would not approach $20 million.
Yuur RWD platform is Chrysler’s- not Fiat’s nor MB’s. And, if MB adopted Chrysler’s manufacturing processes (which my friends at MB deny), there is no guarantee they were properly transferred. And, it’s technology that I mentioned, not manufacturing- and MB stripped many of Chrysler’s innovations- All wheel drive that automatically disconnects and exhaust braking to name just two.
I can never keep track of which car companies own which brands as they always keep changing. Well written, it will be interesting to see how it all plays out.
You know, Suerae, it doesn’t help when a whole bunch of them just changed hands… Volvo, Jaguar, Bentley, Land Rover, Saab… And, that’s just the past five years. So, don’t feel left out…
Thanks for the approbations.
Well the car market is notoriously tough…I suppose that they are all fighting for survival.
MuMuGB recently posted..My Darling Sweetheart
Oh, Muriel, I think every business segment nowadays are notoriously tough. Because in downturns, we all want our piece of the pie- and the pie is smaller…
Thanks for the visit and the comment.
WOW. I had no idea it was this complicated. I nurse along a 1998 Honda Civic which I love. Thank you for the awesome details behind the Chrysler!
Carol Tomany recently posted..Hot Deal
Glad you liked it, Carol.
And, we do need to try to understand the reasons behind some of these motions in the business place.