Chrysler Bankruptcy

by Manshu on May 1, 2009

in Economy

I found out about the Chrysler chapter 11 bankruptcy when I saw a friend browsing through its website looking for some sort of a fire sale. He said that he wasn’t looking at buying a Chrysler, but, if there was a good deal — he was game. I am not sure if others feel this way, but, I felt this was a refreshing take at things.

Fiat Comes In

WSJ reports that Fiat would initially take a 20% stake in the company, which could increase to 35% and even a majority stake, if the government’s debts are paid off.

The majority stake holder would be the Voluntary Employee Benefit Association,  with a 55% stake. The US Government would own 8% and the governments of Canada and Ontario would own 2%.

Cerberus Gets Wiped Out

Since Chrysler was 80% owned by: Cerberus — the wealthy Private Equity (PE) firm; I saw no reason for a bail out. It makes very little sense to give a hand out to wealthy PE investors and hedge funds, while asking the 54,000 employees and 115,000 retirees to make sacrifices.

I think the hedge funds were betting that the government would not risk a bankruptcy and would agree to their demands. I also have a sneaking suspicion that the banks were betting that the hedge funds would not be as generous as them. Both of them have lost their bets.

It Was Almost Bankrupt Anyway

I am glad they lost their bet because I have always felt that there is very little difference between a car company that may go bankrupt any time and a car company that is already bankrupt. Especially, when the US government is willing to back its warranties.

People who differed, compared it to a Honda and asked whether I would rather buy a Honda or a bankrupt Chrysler?

I feel that comparison is flawed.

What you really need to ask is whether you would buy a Chrysler or a Honda. If you would buy a Chrysler, then you need to ask yourself whether you would buy a Chrysler that may go bust any time or a Chrysler that’s already bust.

Till today; I wasn’t sure  of the answer, and I realized that was because the question was incomplete. To complete the question — you have to add another:

At what price?

When I asked that question — I started mulling various possibilities, and that should be heartening for Fiat and Chrysler.

They can make customers interested, if they are innovative enough with their offers, product line and marketing.

Fiat has a great opportunity to enter the US market; offer their line of small compact cars and open up a market which is not very big here. They have Chrysler’s vast dealer network to help them and a new management has a much higher chance of engineering a turnaround than the existing management.

One of my first bosses taught me that I should happy if a customer is yelling at me. He said that the fact that she is yelling, and has not gone to the competition means that I can still win her back. That’s why I say that people looking for fire sales is refreshing, because at least they have not gone to the competition.

{ 2 comments… read them below or add one }

Mikael @ RetireRichRoadmap May 1, 2009 at 2:29 pm

Looking at the bright side of everything is what will make you succeed in life. I actually had the same thought today. Not that I need another car but a Chrysler at half price would be cool.

As for the PE firms and Hedge funds you mention I think that it is important that one remembers that a lot of their money is actually OUR money. Most private equity firms get their money from the large pension funds and insurance companies so if the PE firms go bust it’ll not only hurt them but it will actually hurt US even more.

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manshuv May 1, 2009 at 5:37 pm

I am sure bank’s debts were senior to the hedge funds and if they could accept the deal, then there is no reason why it should be sweetened for the hedge funds. Let’s see what happens in the courts now.

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