Driving Sports

Chrysler today announced bankruptcy and a plan to merge with Fiat and form a new company. This agreement will allow Chrysler to optimize its manufacturing footprint and global supply chain, while providing Fiat with access to the U.S. market.

With Dodge and Chrysler dealers across the nation hearing nothing but crickets for the past few months, and prices on new Dodges falling like rocks, this is welcome news for thousands of dealers and their employees.

“We want to personally assure everyone that the new company will produce and support quality vehicles under the Jeep, Dodge and Chrysler brands as well as parts under the Mopar brand. Chrysler employees will become employees of the new company. Chrysler dealerships remain open for business serving our customers. All vehicle warranties will be honored without interruption and consumers can continue to purchase our vehicles with complete confidence,” explained Nardelli.

Chrysler wanted to avoid bankruptcy, but was not able to obtain adequate concessions from all of its lenders. That move will place the company beyond the reach of many of its creditors, and the current owners, Cerberus Capital Management will lose their entire equity position. Daimler (parent company to Mercedes-Benz) will lose its 19% share of the company, and pay $600 million to Chrysler’s pension funds. Most creditors will get back about 30 cents on every dollar owed to them by Chrysler.

In the new company, the U.S. government will own an 8% share of the company, and will loan the new entity about $5 billion. The Canadian government will provide $1 in loans for every $3 the U.S. government provides. The Canadian federal government and the province of Ontario will own about 2% of the new company.

The big winner in this agreement is Fiat, which will receive 20% of the new company and access to the U.S. market. Conversely, Chrysler will receive access to Fiat’s global market and plenty of small-car know-how from the Italian automaking giant. Fiat stands to gain 15% more of the new company when they successfully produce a small, fuel-efficient car in the U.S.

The bottom line is that Chrysler’s Voluntary Employee Beneficiary Association (VEBA), a structure of the UAW, will own 55% of the company, 35% will go to Fiat, and the last 10% will be held by the U.S. and Canadian governments.

And for those UAW-bashers out there, the union made substantial concessions on wages, benefits, and retiree health care to make this new plan work.

The new company should emerge and pick up operations in 30 to 60 days, and will be called “New Chrysler.” In the interim, the company will be idle and the plants closed. Production is expected to resume when the company emerges from bankruptcy.

Chrysler CEO Bob Nardelli’s head will be on the block. He announced his plan to resign following the emergence of the new company from Chapter 11 and the completion of the alliance with Fiat.

“Now is an appropriate time to let others take the lead in the transformation of Chrysler with Fiat,” said Nardelli.

The last winner in the game is GMAC - which will become the preferred lender for Chrysler dealers. Chrysler owns 49% of GMAC, so this is no great surprise.

So what does it all mean? It’s pretty simple - Chrysler will get out from under crushing debt and UAW contract obligations. Chrysler will have access to better small-car designs and technology from Fiat. Chrysler will have access to Fiat dealers around the world. U.S. manufacturing jobs will be saved. Perhaps most importantly, new management will come in. Overall, this is a good deal.