August 17, 2017

High & Low Finance: Chrysler’s Owners Are Racing for the Cliff

You call him Chrysler’s chief executive.

There has never been a proposed I.P.O. like Chrysler’s.

How is it different?

First, the preliminary prospectus filed by the company this week has only one underwriter listed, JPMorgan Chase. A typical offering by a large company will have at least a few underwriters. Every investment bank wants some of the profits, and the company wants maximum distribution. When General Motors, out of bankruptcy and newly profitable, went public in 2010, 10 underwriters were listed on the first prospectus, including all the big ones. Many more were added before the offering took place.

Here, it is quite likely that the rest of Wall Street stayed away because they feared alienating the very company whose stock was being sold.

Second, the G.M. prospectus, as with every other I.P.O. prospectus I have ever seen, tried to put its best foot forward. Within the bounds of securities laws, the prospectus writers did their best to attract investors. Chrysler’s, within the same bounds, is clearly aimed at alienating investors.

As such, it may become something of a collector’s item. A game of chicken between Chrysler’s two owners — Fiat, the Italian automaker, and a trust that provides benefits to Chrysler’s retirees — has burst into the open.

Each thinks the other is being unfair and is using threats to force concessions. If no one backs down, it is quite possible the company could be destroyed — something that would be disastrous to both. Each seems to be confident that the other will give in eventually.

But games of chicken can get out of hand.

The 2009 bankruptcies and bailouts of Chrysler and G.M. were messy. Some creditors were outraged, contending that they deserved more and that unionized workers deserved less. In both companies, the Treasury and trusts for workers’ benefits wound up owning big stakes.

At Chrysler, which was woefully mismanaged by its two previous owners — Germany’s Daimler and Cerberus, the American private equity firm — the Obama administration concluded that the company’s best hope for survival was to find an automaker with a high-quality management team that could be a valuable partner for a company that had been left with no presence outside North America. Fiat was interested and seemed ideal. It had no United States presence and had technology Chrysler could use. Chrysler had technology Fiat could use. Sergio Marchionne, Fiat’s chief executive, became Chrysler’s chief executive as well.

Most of Chrysler’s stock was owned by a retiree trust, a voluntary employee benefits association, or VEBA. The United States and Canadian governments had stakes as well — thanks to their bailout — and Fiat had a stake.

The combination seems to be working well, benefiting both companies. Chrysler is doing better than the parent these days, and in the end it may turn out that Chrysler will have rescued Fiat as much as or more than Fiat rescued it.

That Chrysler seems to be outperforming Fiat now may, however, say more about geography than competitiveness. The American car market is surging, while the Western European market is in a deep recession. In Italy, Fiat’s home market, new-car registrations are running at the lowest level in more than 30 years.

No one doubts that the two companies need each other, or that Fiat wants to buy the rest of Chrysler. And that is where the game of chicken is being played.

Under agreements that appear to have been poorly drafted, Fiat has a right to buy a substantial part of the VEBA’s interest every six months. The price is determined by a complicated formula that is supposed to represent what a market price for the stock would be if it were public.

It looks as if that formula may not be doing a very good job. When Fiat tried to make the first purchase last summer, it calculated the price as being about a third less than what it had voluntarily paid the Treasury a year earlier in a negotiated deal. The VEBA said the formula, under its interpretation, called for a much higher price. They went to court in Delaware to hash it out.

A ruling this summer gave Fiat a victory on important parts of the case but left others for a future trial. One detail still to be determined is whether the formula allows Fiat to use extraordinary losses to reduce the price it has to pay while ignoring similar gains that would raise the price. That seems to hinge on the meaning of a word (“charge”) that went undefined in the original document.

There are more such purchases scheduled to happen. For the VEBA, avoiding the formula might be very helpful. And the agreement provides that the formula vanishes with an I.P.O. After that, the market price would be used.

That is one reason that the VEBA may have had for exercising its right to sell some of its stock in an I.P.O.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2013/09/27/business/chryslers-owners-race-for-the-cliff.html?partner=rss&emc=rss

Off the Shelf: In ‘Mondo Agnelli,’ a Ride on Fiat’s Roller-Coaster — Review

Without access, without hours of interviews with the people who populate the story, a narrative book is all but doomed. You think everyone would be buying Walter Isaacson’s book if Steve Jobs hadn’t decided to cooperate? Doubt it. What you get without access is an “outside” book, often cold and impersonal, typically cobbled together from magazine and newspaper clippings and interviews with analysts and others who never quite know what’s really going on.

Jennifer Clark, a onetime Rome bureau chief for The Wall Street Journal, has a rousing tale to tell in “Mondo Agnelli: Fiat, Chrysler and the Power of a Dynasty (Wiley Sons, $29.95). It’s the story of the great Italian industrialist, Gianni Agnelli; the turnaround at his family’s crown jewel, Fiat, after his death; and Fiat’s subsequent takeover and government-financed rescue of Chrysler.

Ms. Clark has a good grasp of her narrative, especially when it remains in Italy. From the detail in her text and footnotes, it would appear that she enjoyed decent if unspectacular access to current and former Fiat and Agnelli executives. And, unfortunately, in the end, that’s what “Mondo Agnelli” ends up being: decent if unspectacular.

The book’s most serious failing is an inability to shed much new light on the Chrysler side of the story. “Most of those” at Chrysler, Ms. Clark notes, declined to be interviewed, which is a shame, given that it’s the Chrysler angle that will appeal most to American readers.

The Italian sections of the book are stronger than those set in the United States, so much so that I wonder how good the book might have been had Ms. Clark corralled a co-author based in Detroit. After Fiat’s 2008-9 takeover of Chrysler, the surprising turnaround that Fiat’s C.E.O., Sergio Marchionne then engineers consumes all of 31 pages, the last 10 percent of the book. I’ve read Fortune articles almost as long, and with far more insider sources.

The book begins — well, check that a moment. The story begins toward the end of the 19th century, when a well-to-do Italian cavalryman, Giovanni Agnelli, gets together with several of his chums in the northern city of Turin and decides to start an automobile company. The book doesn’t begin in the same place, though; Ms. Clark is one of those authors who love setting a scene in the present, then looping back again and again, Tarantino-style, to fill in the background. This can work in some books, but here I just kept getting confused.

The company that Agnelli founded became Fiat, and Ms. Clark effectively traces its history and development through world wars and Communist-led strikes. Giovanni was a devotee and friend of Henry Ford’s, and copied Ford’s methods wherever possible. When Giovanni died in 1945, control passed to his grandson, Gianni, who promptly spent the next decade or so romping across the French Riviera with the likes of Pamela Harriman while professional managers ran things back in Turin. For the next 40 years, Gianni kept Fiat afloat, no small accomplishment.

One of the stronger themes that Ms. Clark develops is the importance of the city’s history in Fiat’s growth. Once the capital of the House of Savoy, Italy’s royal family until 1946, Turin retained Savoy’s “Prussian” values well into the 20th century. Loyalty, discipline and hard work were its hallmarks, as they became Fiat’s.

But while loyalty and discipline kept Fiat alive during Gianni Agnelli’s reign at the company — and his family in control — they did not foster much in the way of long-term creativity or ingenuity. By the last years before Gianni’s death, in 2003, Fiat’s culture had calcified. Modern methods, like the manufacture of single parts that could be used in different makes of cars, passed it by. Engineers ran the show; they made the cars, then told the marketing people how many they needed to sell. Nobody thought of asking the marketing folks what kind of car people might actually want.

As a result, Fiat churned out lots of fine little cars that not enough people wanted to buy.

Relief came, unexpectedly, in the person of Gianni’s grandson, John Elkann, who joined the board in 1997 at the age of 21. Though a neophyte, he nevertheless had the good sense to hire Mr. Marchionne, then working in Switzerland. Mr. Marchionne blasted through Fiat’s aging culture, drawing around him scores of young hotshots who dragged Fiat into the 21st century, and then rescued Chrysler.

Ms. Clark does an excellent job of showing how all this played out internally, in large part, one senses, because Mr. Marchionne himself helped guide her through it. Access, access, access.

In the prose, Ms. Clark embraces too many clichés; the phrase “last but not least” is a special favorite. But her sentences are crisp and clear, and she keeps the story moving along nicely, from Giovanni to Gianni to Marchionne. She is especially good at conjuring a sense of place, whether in the Fiat factories or the many Agnelli villas and funerals that dot the text.

All in all, “Mondo Agnelli” is worth a read, even if one remains aware there is probably room for a more ambitious, Ron Chernow-style book on the Agnellis and their empire to be published someday.

Article source: http://feeds.nytimes.com/click.phdo?i=6c72908db33d533b91b61c146ec6c3b5

DealBook: Fiat to Buy Full U.S. Stake in Chrysler

Chrysler 300 at the Detroit auto show.Andrew Harrer/Bloomberg NewsChrysler 300 at this year’s Detroit auto show.

7:02 p.m. | Updated

DETROIT — The Italian carmaker Fiat said Friday that it intended to buy the United States government’s full stake in Chrysler within 10 business days, giving it majority ownership of Chrysler.

The purchase, announced three days after Chrysler paid back its outstanding loans from the Treasury Department, would end the government’s involvement in Chrysler a little more than two years after the carmaker emerged from bankruptcy. It also would return Chrysler to foreign control four years after the dissolution of its merger with Daimler of Germany.

A Treasury spokesman, Mark Paustenbach, confirmed that the department had received notice from Fiat that it would buy the shares, but he declined to comment further.

Fiat and the Treasury will negotiate the purchase price, or have several investment banks determine a fair value if they cannot agree.

Fiat would hold 52 percent of Chrysler after obtaining the government’s shares. Under its agreement with the federal government, Fiat was given the option to buy the Treasury share within 12 months of Chrysler paying back its loans.

By the end of the year, Fiat said it expected to own 57 percent of the carmaker, which is based in Auburn Hills, Mich. The partnership agreement of the companies automatically gave 5 percent of Chrysler to Fiat when they begin producing a car rated at 40 miles per gallon. Fiat originally owned 20 percent of Chrysler and received 10 percent more as a result of helping Chrysler sell vehicles overseas and produce a fuel-efficient engine based on Fiat technology in the United States.

The chief executive of Fiat and Chrysler, Sergio Marchionne, has said he expects to have an initial public offering of Chrysler shares either late this year or in 2012, but Fiat’s decision to buy the government’s stake could affect those plans. Fiat has an option to raise its investment to more than 70 percent by buying a portion of the stake owned by a trust fund that pays for unionized retirees’ health care costs.

On Tuesday, Fiat paid $1.3 billion to buy an additional 16 percent of Chrysler, increasing its ownership to 46 percent, after Chrysler repaid $7.6 billion it had borrowed from the American and Canadian governments.

“We are changing both the image and the substance of our group,” Mr. Marchionne said at the loan repayment ceremony. “And we are regaining the faith of the public at large and, even more importantly, of our customers.”

The Treasury has yet to recover about $2 billion of the $10.5 billion it lent to Chrysler in 2008 and 2009. Some of the money went to the portion of the carmaker — known as “old Chrysler” — that remained in bankruptcy, and is not expected to be repaid. President Obama is scheduled to visit a Chrysler plant in Toledo, Ohio, next week to highlight the company’s turnaround and loan repayment.

Chrysler expects to be profitable this year for the first time since its bankruptcy, a major milestone for a company that came close to being liquidated before the government stepped in to prevent its collapse. It earned $116 million in the first quarter, ending a streak of losses dating to 2006, and its sales and market share in the United States have increased as a result of vastly improved models like the Jeep Grand Cherokee sport utility vehicle.

The Treasury still owns 26 percent of another Detroit automaker, General Motors. It plans to reduce its stake later this year, though it might delay that sale in the hopes of receiving a better price.


Fiat’s Notice of Intent to Buy Out U.S. Stake in Chrysler

Article source: http://dealbook.nytimes.com/2011/05/27/fiat-plans-to-buy-treasurys-stake-in-chrysler/?partner=rss&emc=rss