The Competition for Chrysler

GM cools on Chrysler. And former COO Bernhard joining Cerberus puts a new spin on private equity as the possible future owner of Jeep

Under normal circumstances DaimlerChrysler (DCX) Chairman Dieter Zetsche might be bragging about the fact that his company's share price is up about 14% for the year. But these are not normal circumstances. The run-up is thanks to speculation that Zetsche will soon sell the struggling Chrysler unit, thus injecting luxury marque Mercedes with billions in cash and spinning off a company that German shareholders have mostly seen as a drag on Daimler.

Following a $1.4 billion loss and a sales decline of 5.5% for 2006, Zetsche is under increased pressure to find a buyer for Chrysler. Interest from General Motors (GM), seen as a top contender just a few weeks ago, has cooled. Since companies like Nissan (NSANY), Volkswagen, and Hyundai have publicly expressed a lack of interest, private equity firms are in the driver's seat now. Chief among them are Cerberus Capital Management, which bought 51% of GM's GMAC finance unit in November, and Blackstone Group, the investment firm headed by Wall Street baron Stephen Schwarzman.

Cerberus Enlists Former COO

To boost its Chrysler play, Cerberus has signed former Chrysler chief operating officer Wolfgang Bernhard, 46, to work with the group to come to terms with his former employer. Bernhard's involvement could strengthen the group's chances. He has a history of working with both Zetsche and the United Auto Workers. Bernhard's experience running Chrysler gives him a better perspective not only on what Cerberus should be paying for the unit, but what the subsequent restructuring should look like and what the union is apt to go along with.

But Cerberus will have to beat out some other tough bidders. In addition to GM and Blackstone, Canada's No. 1 parts maker Magna International (MGA) and at least one Chinese automaker have also been to Chrysler headquarters to talk to senior management.

Bernhard's Peripatetic Career

The debonair German engineer is known as a savvy cost-cutter and disciplined operations executive. Before arriving at Chrysler in 2000, he ran Mercedes-AMG group, which makes high-performance, limited-edition versions of Mercedes-Benz production cars. He was tapped to run Mercedes-Benz in 2004 by former DaimlerChrysler chairman Jürgen Schrempp.

His aggressive change-agent style rattled longtime Mercedes executives and the German labor union. When Bernhard failed to support Schrempp's plan to raise the company's stake in Mitsubishi Motors (MSBHY), the political pressures closed in around him and he never actually started the Mercedes job.

Bernhard was forced out of DaimlerChrysler and was hired by Volkswagen to run the VW brand business worldwide. But a management coup last year led by VW Supervisory Board Chairman Ferdinand Piëch to replace VW Chairman Bernd Pischetsrieder also resulted in Bernhard's departure (see, 1/12/07, "What Bernhard's Departure Means for VW").

Wins and Losses at Chrysler

Bernhard's history at Chrysler is as uneven and checkered as the rest of his career. Zetsche and Bernhard cut costs and employees and remade the company's product development system. Bernhard is also frequently hailed as one of the best product development executives in the industry.

In hindsight, his record at Chrysler was pretty spotty. To be sure, the Chrysler 300 sedan, developed on his watch, was a game-changing design for the industry. And he made a critical, and successful, decision to redesign Chrysler's minivan to include two rows of seats that fold away entirely into the floor. A new four-door Wrangler SUV, which is flying off Jeep dealer lots, was also conceived under Bernhard.

But he must also bear the blame for very unsuccessful models like the Jeep Commander, Dodge Durango, Chrysler Sebring, Dodge Magnum, Chrysler Crossfire, and Jeep Compass (see, 2/22/07, "Jeep's Uphill Struggle," and 10/25/06, "Jeep's Misguided Compass"). While Chrysler has notched improvements in quality as measured by J.D. Power & Associates (MHP), the carmaker's interior designs have been consistently criticized for looking cheap at a time when both GM's and Ford Motor's (F) have been praised for matching German and Japanese quality levels.

Since Bernhard had a big hand in many of the products Chrysler sells today, he cannot be absolved from the fact that losses and one-time charges between 2000 and the end of 2006 pretty much cancel out all the profits posted during his time with the company. That lack of progress is what is forcing DaimlerChrysler to consider selling the company today. Chrysler swung to an operating loss of nearly $1.5 billion last year as buyers shunned a model lineup that depended heavily on light trucks and SUVs when fuel prices soared.

DaimlerChrysler said last month it was examining its strategic options for Chrysler, which launched a restructuring plan that will cut 13,000 jobs and close a North American plant as it tries to return to profitability by 2008.

Cerberus and the GMAC Connection

Even before Zetsche put Chrysler in play, General Motors was in looking at an acquisition. GM's top executives reckon they could keep most of Chrysler's 2.6 million vehicles in sales and $62 billion in revenue, but do so while slicing out the costs of most of the company's 18,000 white-collar workers.

By jointly engineering and, eventually, manufacturing Chrysler and GM cars in the same plants, the combined company could save even more. Peeling out Chrysler's lending unit from Daimler's operations and putting it together with GMAC also makes sense, notes Maryann Keller, an industry watcher who sits on the boards of dealer Lithia Motors Group (LAD) and Dollar Thrifty Automotive Group (DTG).

That's another reason Cerberus makes sense as a buyer, perhaps even in a three-way tie-up with GM. Since GM and Cerberus jointly own GMAC, they could just bring in the auto lending assets of Chrysler Finance.

GM Game Plan

But privately, GM executives think they have the best plan for Chrysler. One GM insider says the company isn't high on a three-way deal involving another buyer. A source close to the talks says that GM is taking a relaxed approach to courting Chrysler. Given GM's balance-sheet issues, the company doesn't want to get in a bidding war with private equity players, say sources close to management.

GM would also need a deal from the UAW that would cut health-care costs and possibly manufacturing, too. GM would like to snap Chrysler up, but its executives would rather get it at a fire-sale price, much like the company did when it bought Korean automaker Daewoo International's assets a few years ago. GM waited until the price dropped to pennies on the dollar and then made its move.

If Cerberus wins its bid, Bernhard would figure for a top operating job, perhaps CEO. But neither Cerberus executives nor Bernhard have said so publicly.

A lot can happen in a bidding contest. But it looks like Bernhard at least has a shot at getting to do what he always wanted: run a car company.

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