Chrysler-Fiat Deal: A sign of the times

This deal is a perfect example of the current market we are operating in. First, let me start with the main piece of the deal. Chrysler is exchanging a 35% equity stake for no cash. Additionally, it has been reported that If Fiat meets goals for improving Chrysler's operations within twelve months of the agreement, Fiat would have the option of buying an additional 20% of Chrysler for about $25 million. Only some twenty months ago Cerberus Capital Management purchased an 80.1% stake in Chrysler for $7 billion. Although, if you go back and analyze that deal, Daimler essentially gave Chrysler to Cerberus. Or, in other words, Daimler did not net $7 billion. Instead, $5 billion--of the total $7 billion purchase price--was related to a requirement that Cerberus to inject that amount of cash into Chrysler. Nonetheless, Cerberus gained control of Chrysler for roughly a $5 billion cash investment and today they are willing to give up 55% for no more than $25 million in cash. I understand that Fiat also brings technology and international sales channels to the table, but this only benefits Chrysler is the long term. The significant reduction in the equity value certainly depicts the current state of the market. Not only does it demonstrate the quick deterioration of the US economy and the continuing struggle in the auto industry, it also outlines that change in approach of the private equity firms.

The second fascinating piece of the deal is that the entire deal itself is contingent on Congress providing additional funding. Although a Fiat representative released a statement noting that an additional $3 billion from Congress is not a requirement of the deal, it certainly appears a necessity for the deal to move forward. Because without the additional $3 billion (in addition to the $4 billion already distributed), Chrysler may be forced into bankruptcy. This again demonstrates the unprecedented market we are working in and a true sign of the times. I am not sure how much this partnership with Fiat makes Chrysler any more viable than before. But one thing is for certain, Chrysler still has one major bargaining chip which is thousands of US jobs. Congress won’t turn their back on that.