What Is the Impact of Fiat’s Purchase of Chrysler?

What is the impact of Fiat’s purchase of Chrysler?

Fiat closed its purchase of Chrysler’s assets on Wednesday, June 10th, 2009. Fiat and Chrysler announced the deal that keeps the 84-year old U.S. automaker afloat during tough times for the auto industry. Chrysler had literally been down to its last few dollars before a government intervention in late 2008. This purchase completes an Obama administration-directed reorganization for Chrysler. Other parts of Chrysler will remain in bankruptcy to be sold or outright closed. Remember, Fiat only purchased the “best assets” of Chrysler.
Fiat’s purchase of Chrysler

Fiat Chief Executive Sergio Marchionne became the new CEO of the Chrysler Group LLC after the purchase. The automaker’s former CEO, Bob Nardelli, will return to Cerberus Capital, the one time majority owner of Chrysler, as an adviser. Meanwhile, Fiat’s chief financial officer Richard Palmer has been named CFO of the new company.

In a memo to employees, Marchionne spoke of his optimism about the new company and their outlook for the future. Fiat is known for smaller cars, something that Chrysler has struggled with over the past decade. Said Marchionne:

“There is no doubt in my mind that we will get the job done. This is a bold first step to implement lessons Chrysler and other automakers have learned.”

Marchionne added that Fiat will begin the process of transferring Fiat’s more succesful car technology and powertrains to Chrysler plants worldwide in the next few months. In addition to Fiat, Chrysler Group LLC is also partly owned by a union formed trust company as well as the U.S. and Canadian governments.

The White House was happy about the completion of the deal, and an Obama underling made a statement suggesting that the new alliance is “poised to emerge as a competitive, viable automaker.” The completion of the all important Chrysler sale in just about the advised time frame Obama planned has been seen by industry analysts as a good sign for the company’s prospects. What must Chrysler Group LLC have to do to stay afloat? That’s what General Motors Corp is asking tonight — they are facing a similar fate as Chrysler. GM filed for bankruptcy on June 1, 2009. The GM sale will certainly take longer than the Fiat-Chrysler deal due to the sheer size of GM — the top U.S. based automaker. One thing is for sure — GM will be majority owned by the U.S. government when its sale is completed.

So what does the formation of the new Chrysler Group LLC mean for consumers? What does bankruptcy mean for Joe or Jane Taxpayer if he or she owns a GM or Chrysler or if they are thinking about buying a new one?

The news is good. Even though the companies face some serious legal hurdles before becoming solvent, the consumer probably won’t notice anything different at all. Both GM and Chrysler are still selling cars, after all, even though they have both announced serious plans to cut back on the number of dealers they work with. Don’t forget that the United States government has promised to back the warranties from both companies — this was done to reassure American car buyers. In short, you have nothing to worry about.

The two companies are hoping to gain a new life by making these deals. A reorganization in bankruptcy court means the salvation of hundreds of thousands of jobs that depend on the American auto industry. The federal government, which is busy loaning billions to both companies, hopes that a court approved bankruptcy and corporate reorganization will keep Chrysler and GM from bleeding out financially, and that these companies can eventually be remade into strong players in the world auto market.

So what is GM looking to learn from the collapse and rebirth of Chrysler? The major difference is the size of the companies. Fiat was only able to make this deal with Chrysler because Chrysler is much smaller than GM, and the assets were less expensive.

As the nation’s largest automaker, GM would be one of the largest bankruptcy protection filings ever, if not the largest. Industry analysts are split on that one. However, we know that GM made literally twice as many autos as Chrysler did last year — 3 million produced versus 1.5 million, it doesn’t get much more clean cut than that. GM also employs almost four times as many people as Chrysler. Also, GM has plants and operations in many more countries than Chrysler did. GM is watching the Chrysler deal for tips, but not expecting their transition to run as smoothly.

Part of GM’s plan is to downsize — the company has already made it known that they will do away with the Pontiac brand as part of their efforts to reorganize.

Its important to remember that GM operates globally, while Chrysler is more of a national interest. GM sells cars in over 140 countries, and they own overseas based brands like the Saab (from Sweden), the Vauxhall (from Britain), and the German Opel. Separate deals will certainly have to be struck to resolve international issues related to GM’s overseas holdings. In fact, the German government is already in talks to protect Opel and its 25,000+ workers from a potential GM collapse. Not to mention that GM will have to navigate the bankruptcy law of several foreign countries when filing for bankruptcy in court.

To get a clearer picture of the difference between a GM and Chrysler deal, just look at the amount of money spent on lawyers and other legal assistants who will work in bankruptcy court. Many lawyers and analysts estimate that fees in the Chrysler case will reach in the area of $550 million. Certainly, that’s not chump change — but when you place it up against the estimate for GM’s filing (almost $2 billion) there’s simply no comparison.