Chapter 3: Recalculating

Failed Talks and an Italian Wedding

Photographer: Greg Ruffing/Redux
Sergio Marchionne, CEO of Chrysler-Fiat, at the automaker's company HQ in Auburn Hills, Michigan.

By August 2008, the situation was getting desperate. The Detroit Three were burning through billions every month. GM (GM) and Chrysler were running out of time. Chrysler's new owner, Cerberus Capital Management, was a New York private-equity firm named for the three-headed hellhound in Greek mythology that guards the gates of the underworld. In its first -- and last -- foray into automaking, Cerberus was feeling the heat of a hell of its own creation. It was looking for an exit strategy.

Chrysler President Tom LaSorda, an affable Canadian with an impish grin and a blue-collar background, was deputized to conduct "synergy studies" to find another company to pair up with the ailing automaker. LaSorda (no relation to the Hall of Fame baseball manager) had been Chrysler CEO in the waning days of Daimler ownership and his climb to the pinnacle of the company was a triumphant moment, if short-lived. He grew up in a small house, one of nine siblings, across the Detroit River in Windsor, Ontario, where his father built minivans in the Chrysler factory that could be seen from his front porch. Now LaSorda was second banana to Bob Nardelli, the well-dressed, smooth-talking former General Electric Co. (GE) and Home Depot Inc. (HD) executive Cerberus had installed as CEO in August 2007. Nardelli, recognizing LaSorda knew the car business better than he did, asked him to find a savior for the automaker.

Tom LaSorda, vice chairman and president of Chrysler LLC, right, at Chrysler's headquarters in Auburn Hills, Michigan, in September 2008. Photograph by Gary Malerba/Bloomberg Close

Tom LaSorda, vice chairman and president of Chrysler LLC, right, at Chrysler's... Read More

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Tom LaSorda, vice chairman and president of Chrysler LLC, right, at Chrysler's headquarters in Auburn Hills, Michigan, in September 2008. Photograph by Gary Malerba/Bloomberg

Reckoning to Revival: Rebuilding the U.S. Auto Industry
Ch. 1
Buckle Up: The Potholes Stay Where They Are
Ch. 2
Off-Road: The SUV's Ride From Peak to Valley
Ch. 3 Recalculating: Failed Talks and an Italian Wedding
Ch. 4 Rearview: Obstacles Closer Than They Appear
Ch. 5 Done Dealership: Collateral Damage to a War Hero
Ch. 6 Idling: Father and Son Live Through Layoffs
Ch. 7 Recall: Insourcing Workers From Detroit
Ch. 8 Trim: Moving the Assembly Line Outside
Ch. 9 High Gear: A New Jeep Every Minute
Ch. 10 Differential: The Divide Over Wages
Ch. 11 Ignition: 'Isn't That What America Is All About?'
Post-Crash Site: Five Scenes of a New Life

Initially, LaSorda sought out Nissan-Renault CEO Carlos Ghosn and Fiat's (F) Sergio Marchionne, two European car bosses looking to grow in the U.S. Talks petered out as the economy tanked and Chrysler's needs grew more urgent and expensive.

So LaSorda turned to the company where he worked for 23 years before joining Chrysler in 2000: General Motors. In late August, LaSorda convened a secret meeting with GM President Fritz Henderson to discuss a megamerger. Each company's shrinking cash was already causing bankruptcy buzz. "The idea was how could we combine these two companies and create a big synergy," recalled LaSorda, now 59. Joining forces could strengthen them and make them the largest auto company in the world -- a title GM was losing to Toyota (TM). Bob Lutz, by then GM's vice chairman and head of product development, worked with Henderson to identify how much money could be saved. Said Lutz: "Fritz and I, being conservative, estimated at least $9 billion to $12 billion in savings in the first year."

The formula, as Lutz saw it, would be similar to the way Chrysler absorbed AMC back in 1987: take the best of what the smaller company has to offer and dump the rest. At Chrysler, that meant keeping the Jeep line, the Dodge Ram pickup, the company's top-selling minivans and its 300C large car. "It would have meant making a lot of things go away," said Lutz, such as Chrysler's vast Auburn Hills engineering center and its factories in the U.S. and Canada -- and the workers inside them.

That wasn't what LaSorda had in mind. He saw the companies remaining distinct and mostly intact, while saving billions by blending purchasing and back-office operations such as accounting.

These opposing viewpoints didn't come into focus until news of the top-secret negotiations leaked in October, shortly after Lehman collapsed and the financial contagion was spreading. With nothing left to hide, GM put its cards on the table. LaSorda was stunned. He saw thousands of factory workers like his father losing their jobs under GM's Darwinian plan.

"They would have wiped out Chrysler," LaSorda said. "The only winners would have been General Motors and the banks. And the people at Chrysler would have lost. When it came to that, we just told them to get lost."

Video: GM's High-Tech Advantage: The Connected Car

Lutz remains surprised at LaSorda's rejection. "Of course it would've become one automobile company. There's no point in doing a merger and acquisition if you're not going to consolidate, because you won't save any money," Lutz said. "That's how you make one successful automobile company out of two unsuccessful ones."

Instead, there were now three unsuccessful auto companies in Detroit, running out of ways to save themselves.

A month later, the CEOs of GM, Ford (F) and Chrysler trooped to Washington to beg for a bailout. They were ridiculed by congressional interrogators for everything from the gas guzzlers they produced to the corporate jets in which they flew down to request a government handout. "Saturday Night Live" lampooned the hapless Detroit chieftains, with Darrell Hammond portraying Nardelli to peals of laughter when he had the CEO appear clueless in response to a question about how to produce fuel-efficient cars.

With Detroit a laughingstock, Fiat's Marchionne quietly contacted LaSorda to renew talks. Marchionne, now 61, was no longer interested in the small-scale deal they had discussed to sell Fiat 500 subcompacts in Chrysler's U.S. showrooms. Now he saw an opportunity to merge the companies and wanted to know how to proceed. LaSorda told him to send him a letter and he'd get it to the bosses at Cerberus.

On Dec. 28, 2008, Marchionne sent LaSorda a letter detailing "the terms by which we'd get engaged." The offer came nine days after President Bush threw GM and Chrysler a $17.4 billion lifeline that would sustain them until President Obama expanded it to an $80 billion bailout. For Chrysler, though, Obama had one big condition: It had to allow Fiat to take control in order to get its government-financed bankruptcy reorganization. The president was convinced Chrysler couldn't survive on its own and Fiat was the only suitor.

Marchionne gained control of Chrysler without paying any money. Instead, he offered Fiat's small-car technology and knowledge. As LaSorda said, "You lose all kinds of leverage when the president of the United States of America says, `The only way you're going to get money is if you find a partner who's willing to step in.'

"Sergio played that pretty nicely."

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