Cerberus Capital Management, L.P. is one of the world's leading private investment firms. It specializes in providing both financial resources and operational expertise to help transform undervalued companies into industry leaders for long-term success and value creation.
The company is headquartered in New York City with partner and/or advisory offices within United States and around the world. With its minority interests in companies around the world the company generates over $60 billion in annual revenues. On May 14, 2007 DaimlerChrysler sold 80.1% stake of its Chrysler Group to Cerberus Capital Management, while Daimler retained 19.9%.
Cerberus invested $7.4 billion in a new venture which will be called Chrysler Holding LLC. Daimler will not get any money; in fact it will pay $650 million to cover Chrysler’s outstanding debt and restructuring changes. Chrysler LLC will assume all retiree obligations, including its overfunded pension plan and 19 billion in retirement liabilities. With the acquisition of Chrysler Cerberus has issues to resolve such as healthcare and retirement liabilities and opportunities that will lead the organization toward success.
Cerberus purchased Chrysler knowing that it had a huge debt to pay off on retiree health care benefits. The elimination of these liabilities can have a significant impact on the future of the company. The debt has been accumulated due to the fact that too little money has been set aside to pay pensions and retiree health benefits.
The taxpayer should not have to pick up the burden. The government has guaranteed to take care of pensions that have not been taken care of by organizations through the Pension Benefit Guaranty Corp. If the government loans the money to Chrysler, it will have to pay back with interest accumulated. To avoid its dept Chrysler can not file bankruptcy; consumers will not buy cars from a bankrupt manufacturer.
A solution for Chrysler is to turn to VEBA (voluntary employee benefits associations). In the following deal a trust assumes the obligation, where Chrysler would shift all or part of their health care liabilities to be managed by United Auto Workers. Chrysler would back the fund with a giant one-time cash infusion. In exchange workers would agree to contribute money toward their health care benefits. Chrysler will benefit by capping off the health care cost off the balance sheets.
This would lower costs and make automakers more competitive (Welch, D. 2007) Cerberus has an opportunity to reestablish partnership with Chrysler’s dealers. The dealers objectives have to be Cerberus’s objective and dealers are an extension of the company. If dealers are not profitable then the company is not profitable. As a result attention is being paid to making dealers happy. “After 17 years selling cars in West Palm Beach, Florida, James Arrigo knows a thing or two about what consumers want.
There should not be 1,000 ways to order a minivan, he says. And he is tired of watching Chrysler botch the launch of critical new models like the Sebring, a midsize sedan. It should be a front-running in that segment, but because of quality and marketing issues, it, does not compete” (Muller 2007). According to Arrigo for many years dealers like him have offered suggestions for how Chrysler could sell more vehicles and improve its image.
Unfortunately, when Chrysler was owned by Daimler, those ideas took a back seat to concerns about cost control or factory productivity. Another incentive for the dealers is to get money for ordering a car and another payment for selling the car.
Instead of a bonus just for moving volume, dealers can pocket the money or pass it along to the buyer. Either way this strategy supports the dealers. Another opportunity for Chrysler is to cut sales to rental car fleets.
This type of transactions are typically not profitable and sometimes even money loosing. Annually Chrysler sells 200,000 vehicles to rental car fleets, Cerberus believes that cutting rental sales will eliminate the supply of low mileage used Chrysler vehicles on the market and help the company get better prices for its new cars. Also, Cerberus is to cut Chryslers hourly labor cost, which rank as the highest in the industry.
Chrysler pays $76 per hour to its UW represented workers, compared with $48 for industry leader Toyota Motor. As a result Chrysler is planning to cut 1,500 whit collar positions to reduce overall costs. The company has the opportunity to fund newer models and get a marketing makeover.
Chrysler’s new designs are selling like they are already few years old. According to Edmunds.com it takes 28 to 107 days to “Turn” or move off dealer lots. To fix this problem Chief Executive Robert Nardelli and Vice Chairman James Press spend an entire day at Chrysler’s test track in Chelsea, Michigan looking over every vehicle in Chrysler’s lineup. By the end of the day Nardelli had ordered more than 200 engineering changes to fix the selected problems at a cost of $100 million (Muller 2007).
Cerberus wants Chrysler to succeed, and perhaps get a quick return on the $7.4 billion that it invested on Chrysler. Chrysler has a long road towards success. Some of the opportunities mentioned above will help the automaker in the long run. Only time and the economic status of the country will tell about Chrysler’s accomplishments and weather or not Cerberus made the right choice by purchasing Chrysler.
References Muller J. (2007). Chrysler’s Last Stand. Retrieved February 9, 2008 from forbes.com Muller J. (2007). Will Private Ownership Be The Model That Saves The Struggling U.S. Auto Industry? Retrieved February 9, 2008 from forbes.com Welch D., Byrnes N. Bianco A. (2007). A Deal That Could Save Detroit. Business week, 4036. p. 30-33. Retrieved February, 9 2008 From EBSCOhost database.