Chrysler's Price: Embarrassingly lowLook more closely at Cerberus' $7.4 billion purchase, and you'll see that it's basically pocket change. Plus: What the deal means for Detroit. NEW YORK (CNNMoney.com) -- Give DaimlerChrysler and Cerberus credit for moving quickly to work out a deal for Chrysler. Auto companies are complicated beasts and letting Chrysler dangle in the wind was in nobody's best interest. The big surprise was getting the United Auto Workers on board in time for the announcement. Labor leaders, who had been lobbying against a sale to private equity, could have been a major impediment.
As for the U.S. auto industry as a whole, however, the Chrysler-Cerberus deal sends very mixed messages, most notably, the bargain basement price. On the plus side, putting Chrysler in the hands of a private equity group will hasten the industry's rationalization. The Cerberus guys will have no romantic ties to Chrysler's past and can be expected to move quickly to remove unneeded people, brands, dealers, and assembly capacity, which should benefit General Motors and Ford in efforts to stabilize their market shares. The deal also removes the threat that a wounded and flailing Chrysler would unleash a price war that would force GM and Ford into a mutual blood-letting. Also, that the UAW has agreed, at least in principle, to a Cerberus takeover sends a positive signal about industry-wide contract negotiations this summer. One of the biggest questions has been whether UAW leaders would be able to convince members of the need for flexibility in dealing with the wounded automakers. The fact that UAW President Ron Gettelfinger was willing to bless the Cerberus deal at the outset indicates that he, at least, is willing to step out front and issue a clear directive to his members. The more militant Canadian Auto Workers, however, may be more difficult to bring around. On the negative side, the deal puts an embarrassingly low value on Chrysler. Forget the $7.4 billion dollar figure displayed prominently in the headlines. Dig a little deeper and you realize that $5 billion represents Cerberus' capital infusion into the auto business and another $1 billion an infusion into the finance business. When all the bookkeeping is completed, Daimler will actually record a net cash outflow of $650 million to be rid of Chrysler. So if Chrysler's 15 percent share of the U.S. auto market is worth basically pocket change, what kind of a value does that place on GM (Charts, Fortune 500) and Ford (Charts, Fortune 500)? The stock market currently says they are worth $17.6 billion and $16.6 billion respectively, and shares of both companies were rising Monday morning. If either company were actually put up for sale, though, the numbers might come out a whole lot lower. Remember, several factors weighed in Daimler's (Charts) favor in getting the best possible price. Chrysler had several competing buyers, and Cerberus wasn't even considered the leading contender. Also, although it had the appearance of a fire sale, Daimler always had the option of retaining ownership of Chrysler, and in fact will hang on to 20 percent of the company when the transaction closes. What this indicates is that while there may be plenty of capital sloshing around the world, and plenty of firms eager to deploy it, they aren't so eager as to want to overpay for a damaged asset. This will undoubtedly put more pressure on restive members of the Ford family who may be looking to cash out of their holdings, now worth less than half what they were five and a half years ago. As reported in the April 16 issue of Fortune Magazine, the family has been shopping around for an investment adviser to come up with the best strategy. A sale of their stake to private equity has always been on the list of options. So has reorganizing Ford Motor as a holding company and selling or spinning off the money-losing North American operations. On the whole, the industry's best interests will be served by the Chrysler deal going forward. It will remove uncertainty from the business and accelerate a restructuring that has been going on in fits and starts for 30 years. The process of getting smaller, leaner, and more profitable will need to pick up speed, however, to keep one of the three companies from going into bankruptcy - and dragging the other two down with it. |
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