U.S. Big Three automakers remain independent companies by June 30, 2009?

@Yi-Wyn ... can you clarify how the following events would fare against this prediction?
1) What if additional federal aid result in equity exchange to the government?
2) What if GM and Chrysler merge? See http://www.foxnews.com/politics/2008/12/17/chrysler-gm-reopen-merger-tal...
3) What if GM sells of Volvo or Saab? See http://uk.reuters.com/article/businessNews/idUKTRE50B0A920090112

Great. Thanks.

Hi David, Chrysler still remains independent. For now. Fiat has taken a minor stake in the company. Should Fiat announce it will increase its share to 55%, then Chrysler is giving up the major portion of its company and would then be judged not independent.

GM and Chrysler have until March 31 to get approval from the federal government that they're on the right track to survival.

@TIS, Managed bankruptcy = loss of independence?

David: If it's 50.1% or more, yes. Shouldn't matter if it's a VC group, the government, or the UAW.

Ian Lamont
Managing Editor
The Industry Standard
twitter.com/ilamont

David: I am going to hold off. Chrysler still has until midnight tonight to work out a deal with bondholders and Fiat, which could potentially impact the UAW move:

http://www.reuters.com/article/privateEquity/idUSLU94090620090430

Ian Lamont
Managing Editor
The Industry Standard
twitter.com/ilamont

Looking at this a little closer, according to http://www.nytimes.com/2009/05/01/business/01primer.html, judge could void the agreement with UAW during bankruptcy.

Regardless, unfavorable judgment unavoidable.

1) If Chrysler does file for bankrupty, it meets the bankruptcy criteria.
2) If Chrysler does not file for bankruptcy, UAW deal goes into effect May 4 with 55% stake which meets the over 50% criteria.

@Ian, the following update to the prediction verbiage clarified the criteria, "To clear up some confusion, any of the big 3 automakers loses its claim to "independence," or ability to run one's own operations, if the company announces an acquisition or files for bankruptcy" justifies a judgment.

What I meant by voiding was the deal that UAW reached with Chrysler. Voiding of a bankruptcy filing or challenge to the filing is not part of the criteria. It specifically states "files for bankruptcy".

David: Yes, this is a challenging one, but I have to hold off on judgment. Some of the criteria defined in the prediction have yet to be satisfied.

Here's my reasoning:

Even though the company has announced it has filed for bankruptcy, the court has yet to approve it. In addition, the prediction defines independence as the "ability to run one's own operations." It states that "an automaker will lose its independent status should another company take a major stake (51% or more)."

Neither of those conditions has been met ... yet. While it seems likely to happen, it hasn't happened yet, and there are still two major hurdles.

First, please note the highlighted sections in the April 30 press release from Chrysler LLC:

+++++++++++++++++++++++++++++

http://www.chryslerllc.com/en/news/

Chrysler LLC and Fiat Group Announce Global Strategic Alliance to Form a Vibrant New Company
PRESS RELEASE:

Auburn Hills, Mich. - April 30, 2009

Chrysler LLC today announced that, as a result of the comprehensive restructuring plan agreed to by many of its stakeholders, it has reached an agreement in principle to establish a global strategic alliance with Fiat SpA to form a vibrant new company. It will allow Chrysler and Fiat to fully optimize their respective manufacturing footprints and the global supplier base, while providing each with access to additional markets. Fiat powertrains and components will also be produced at Chrysler manufacturing sites.

"This partnership transforms Chrysler into a vibrant new company with a wealth of strategic advantages," said Bob Nardelli, Chairman and CEO of Chrysler. "It enables us to better serve our customers and dealers with a broader and more competitive line-up of environmentally friendly, fuel-efficient high-quality vehicles. Benefits to the new company include access to exciting products that complement our current portfolio, technology cooperation and stronger global distribution."

Chrysler initiated discussions with Fiat more than a year ago to develop plans for a global product alliance. Over the past several months, these discussions have evolved and expanded. Chrysler and many of its stakeholders worked tirelessly to agree upon concessions that will result in a significantly lower cost base and enable fulfillment of a broader strategic alliance.

"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.

Despite substantial progress on many fronts, Chrysler was not able to obtain the necessary concessions from all of its lenders, which would have avoided the need for a bankruptcy proceeding. As a result, under the direction of the U.S. Treasury, Chrysler LLC and 24 of its wholly owned U.S. subsidiaries today filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in U.S. Bankruptcy Court for the Southern District of New York.

"Even though total agreement was not possible, I am truly grateful for all that has been sacrificed, on the part of many of Chrysler's stakeholders to reach an agreement in principle with Fiat," said Nardelli. "My number one priority has been to preserve Chrysler and the thousands of people who depend on its success. While I am excited about the creation of the global alliance, I am personally disappointed that today Chrysler has filed for Chapter 11. This was not my first choice."

Chrysler also will file a motion under Section 363 of the Bankruptcy Code requesting the swift approval by the Court of the agreement with Fiat and the sale of Chrysler's principal assets to the new company. The benefit of this type of filing is speed. It should allow a leaner new company to emerge in a matter of 30 to 60 days, well positioned for long-term viability.

Nardelli, who has been leading Chrysler since August 2007, also announced to Chrysler LLC's Board of Management and the U.S. Treasury his plan to leave the company following the emergence of the new company from Chapter 11 and the completion of the alliance with Fiat. He will return to Cerberus Capital Management LP as an advisor. "Now is an appropriate time to let others take the lead in the transformation of Chrysler with Fiat," said Nardelli. "I will work closely with all of our stakeholders to see that this new company swiftly emerges with a successful closing of the alliance."

During the restructuring process, the government will provide sufficient debtor-in-possession (DIP) financing to allow continuation of "business as usual." The company will seamlessly honor warranty claims, pay suppliers and keep our dealer body operating to continue to serve our valued customers.

"To create this vibrant new company, we are using this structured bankruptcy to rapidly implement tough but necessary changes, including: the agreed upon wage and benefit structure for active and retired employees that is competitive with those of transplant manufacturers; a reduction of debt and interest expense; the disposition of idle assets; a rationalized and more efficient dealer network; and sound agreements with our suppliers," said Nardelli.

Chrysler's Mexican, Canadian and other international operations are not part of any bankruptcy filing.

As part of the restructuring and with the backing of the U.S. Treasury, we have reached an agreement in principle with GMAC to become the preferred lender for Chrysler dealer and consumer business. GMAC will be able to offer the best long-term finance options for Chrysler dealers and customers with standard rate installment products.

When the transaction is completed, the Voluntary Employee Beneficiary Association (VEBA) will own 55 percent of the new company and the U.S. and Canadian governments will own proportionate shares of a 10 percent stake. Fiat will initially hold a 20 percent ownership stake in Chrysler. Fiat will have the right to increase its ownership stake an additional 15 percent in three increments as it meets the following criteria: 5 percent for bringing a 40 mpg vehicle platform to Chrysler to be produced in the U.S.; 5 percent for providing a fuel-efficient engine family to be produced in the U.S. for use in Chrysler vehicles; and 5 percent for providing Chrysler access to its vast global distribution network to facilitate the export of Chrysler vehicles. Fiat cannot become a majority owner until after all U.S. government loans have been completely repaid.

As a part of the restructuring, most manufacturing operations will be temporarily idled effective Monday, May 4, 2009. Normal production schedules will resume when the transaction is completed, which is anticipated within 30 to 60 days.

"We want to recognize the Administration, the U.S. Treasury, President's Auto Task Force, as well as Members of Congress and representatives at the state and community level and Canadian Federal and Ontario Provincial governments for their energy and efforts in helping to move this new company forward," Nardelli said. "It is also important to acknowledge Cerberus and Daimler, which provided the foundation for the alliance as well as Chrysler's many other stakeholders including the UAW and CAW leadership, employees, dealers and suppliers. Without their deep sacrifices, unstinting loyalty and enduring belief in Chrysler, the alliance would not have been possible. We look forward to our new partnership with Fiat. To be sure, there will be many changes as we move forward to implement our plans. But today, from many great parts, we begin to build a vibrant new company with less debt, a stronger balance sheet, richer product portfolio, supported by a well-positioned finance company."

+++++++++++++++++++++++++++++

A lot of this language is phrased in the future tense. Nardelli is still running the company. He won't step down until after the "new company" emerges following the "restructuring process." At that point, VEBA will take a 55% ownership stake, at which point the independence criteria ("an automaker will lose its independent status should another company take a major stake (51% or more") shall be satisfied.

In addition, there are two potential hurdles to the deal as described above going through. I would like to draw your attention to the following New York Times blog post:

http://dealbook.blogs.nytimes.com/2009/05/04/the-ins-and-outs-of-the-chr...

Note the following excerpts:

"But for those who are deal junkies, the real interest in the papers is in the asset sale agreement. This is the operational document that will transfer the Chrysler business to the newco, if the bankruptcy court approves the transfer." ...

" ... The key to this deal is that the parties have put it on a short leash. The agreement states that if the Chrysler sale is not completed by June 15, 2009 — extendable by 30 days if antitrust clearance is still needed — then Fiat can terminate the agreement at any time. This allows Chrysler to argue to the bankruptcy court that the sale must be completed as soon as possible or otherwise will be lost."

So, the bankruptcy court has yet to approve the transfer. There are several disenfranchised parties floating around who stand to lose billions; and they will probably want to share their views and evidence with the court. In addition, if there is a delay, Fiat can bail -- which would scuttle the announced agreement. That would force everyone else to scramble to find an alternative by June 30.

I know that you (and others) have $S tied up in this prediction, but I want to be fair to all participants. It may not be the popular decision, but considering the substantial issues described above, it's the right thing to do.

I will also strive to be much more careful in the wording of predictions going forward. I think that one thing that really made this difficult is the word "announced" is used in the prediction, even though it contradicts another part of the criteria -- an entity actually needs to take majority control, which has yet to happen.

Ian Lamont
Managing Editor
The Industry Standard
twitter.com/ilamont

From http://www.bloomberg.com/apps/news?pid=20601103&sid=aCWc52_2KMYs&refer=u...

U.S. Bankruptcy Judge Arthur Gonzalez approved Chrysler’s auction plan at about 11 p.m. yesterday in Manhattan. He overruled an objection from a group of Chrysler’s secured lenders that the process was overly influenced by President Barack Obama’s administration

A GM Chapter 11 still won't satisfy your 'revised' criteria? Is that right?

@Ian, I am cashed out. I placed my bet based on clarifications made which has now been deemed insufficient.

@Ian, I was referring to the "loss of independence status if it files for bankruptcy" criteria which has happened. There were no further clarification that the filing is challenged or resolved.

Judge approves Chrysler's sale motion, but there is still the threat of an appeal:

http://www.washingtonpost.com/wp-dyn/content/article/2009/06/01/AR200906...

Ian Lamont
Managing Editor
The Industry Standard
twitter.com/ilamont

The Supreme Court delays the Chrysler sale:

http://www.washingtonpost.com/wp-dyn/content/article/2009/06/08/AR200906...

The decision buys the court time to consider objections filed hastily over the weekend, and it comes as the clock is ticking. has the option of backing out of the deal if it is not finalized by Monday, and the government has warned that the only alternative would be to force the nation's third largest domestic automaker into liquidation, throwing the industry in turmoil and leaving tens of thousands of people without jobs.

Ian Lamont
Managing Editor

Judged. Now that the Supreme Court has backed off, Fiat has closed the deal. Chrysler has emerged as a "new company" under new management, with operations beginning immediately:

http://www.reuters.com/article/newsOne/idUSTRE5592VU20090610

Ian Lamont
Managing Editor
The Industry Standard
twitter.com/the_standard

David: While you are correct in noting that Fiat does not currently have majority ownership, another entity most definitely does.

As higlighted earlier in the comments section, the new company actually has a majority ownership by the UAW's Voluntary Employee Beneficiary Association. This was confirmed in press reports. This is how the LA Times describes the arrangement:

Fiat will take a 20% stake in the new Chrysler and Fiat Chief Executive Sergio Marchionne will serve as the top official at Chrysler. Chrysler's chairman will be Robert Kidder, who was selected for the role last month.

The largest stakeholder in the company will be the United Auto Workers union, which is receiving a 55% share in exchange for about $6 billion owed to a retiree healthcare trust. The U.S. government, which has lent Chrysler $8.6 billion to date and will contribute more in exit financing, takes an 8% share, while Canada, another lender to the automaker, gets 2%.

The company will have a nine-member board, with four positions chosen by the U.S. government, three by Fiat, and one each by the Canadian government and the UAW.

So, another entity -- the UAW -- now has a majority stake in the new company. The board is made up of other stakeholders including the U.S. government and Fiat, and a Fiat-appointed executive runs the company. Chrysler has clearly lost its ability to run its own operations.

Ian Lamont
Managing Editor
The Industry Standard
twitter.com/the_standard

David: The prediction did not say majority voting rights -- it said "major stake," and defined it as 51% or more. I further clarified this in response to a question from you in late April.

Moreover, the main focus of this prediction -- whether the Big 3 automakers remain independent by June 30 -- can now be determined. Legal arguments against the deal were exhausted, and it formally closed today. By any measure -- boardroom control, executive control, stakeholder ownership -- Chrysler is no longer in control of its own destiny.

Ian Lamont
Managing Editor
The Industry Standard
twitter.com/the_standard