The Italian solution

Fiat’s chief executive, Sergio Marchionne, has gone merger mad

HIS company is among the smallest of the global volume carmakers. But right now Sergio Marchionne is without question the most talked-about car executive in the world. The chief executive of Fiat Group has been alone in seeing an extraordinary opportunity in the meltdown in Detroit. By seeking to take over the running of both Chrysler and Opel, the European arm of General Motors (GM), Mr Marchionne is attempting not only to transform Fiat into a car group almost of the scale of mighty Toyota and Volkswagen (VW), but also to change the face of a perennially troubled industry.

Last December Mr Marchionne said of his stricken industry: “What we are seeing is unprecedented. I have never seen the failure of so many systems at once.” Fiat was in a fight for survival. “We’re just going to slam the brakes on, use as many temporary lay-offs as needed, cut everything back to essentials.” He added an apocalyptic forecast. “By the time we finish with this in the next 24 months, as far as mass producers are concerned, we’re going to end up with one American house [Ford or GM, you presume]; one German of size [VW Group]; one French-Japanese, maybe with an extension in the US [the Renault-Nissan alliance]; one in Japan [Toyota], one in China [several possible candidates] and one potential European player [either Fiat or PSA Peugeot Citroën].”

The details of this vision may be wrong. Despite its present travails and imminent bankruptcy, few believe that GM will vanish and leave Ford as the sole American-owned champion. France’s PSA Peugeot Citroën, though unwieldy, is not about to disappear either. The strength of Hyundai-Kia in emerging markets and North America should ensure that the South Korean producer makes the cut. And in Japan, however great the cull of smaller outfits such as Mitsubishi and Suzuki, Honda and perhaps Mazda will still be around to challenge the dominance of Toyota in its home market. So will Renault’s partner, Nissan.

But if the shake-up is likely to be less dramatic than Mr Marchionne expects, that is only because much of the industry remains addicted to wildly unrealistic market-share forecasts and value-destroying investments. Mr Marchionne thinks it has been living beyond its means for too long. “Out in front,” he says, “this business is glamorous like Las Vegas. But behind the scenes, the industrial machine is complex and chaotic. We just look round at what to invest in and it’s hard to justify the economics. To sort it out, you have to go back to the industrial machine and fix it.”

Critically, Mr Marchionne says, you need to sell in sufficient volume—about 1m a year on each platform—to drive down costs. Take the platform for the VW Golf, which yields sales of more than 1.5m a year because VW also uses it for the Skoda Octavia, the Seat Leon and the Audi A3. About 75% of the cost of a car is in its architectural underpinnings. The rest goes on giving it a distinctive body and cabin, while honing the brakes, steering and suspension. Fiat gets sales of about 600,000 from its city-car A platform (the basis of the Panda, the retro-styled 500 and Ford’s new Ka). But none of its other platforms comes close to what is required: the whole group sold only 2.15m cars last year (see chart). Mr Marchionne reckons the minimum for a volume maker competing in every sector is about 5.5m—leaving Fiat far from safety.

In the past Fiat has tried to get around this problem with various alliances. A tie-up with GM lasted for five years until 2005, when Mr Marchionne extracted $2 billion from the American firm to extinguish a put option that would have forced it to buy the then-sickly Italian company. Mr Marchionne believes that alliances are all very well, but they react too slowly and require too many compromises. Without speed, he believes, you are doomed.

Over the past year he has been developing a more ambitious strategy, at first constructed around Chrysler, but now including Opel. Cruelly mismanaged by Daimler during its decade of ownership, and too dependent on pickup trucks and an ageing line-up of SUVs, Chrysler was in no condition to withstand the storm. Its increasingly desperate management sought help from a host of other carmakers, including Fiat. It reached a tentative agreement in which Nissan would have made a small car for Chrysler and Chrysler would have built a pickup for Nissan. But that was the limit for Carlos Ghosn, under pressure as boss of the Renault-Nissan alliance.

Mr Marchionne came up with a plan that might win Chrysler the federal loans it needed to stay alive while getting Fiat much of what it wanted. In exchange for an equity stake of around 35%, Fiat would make available to Chrysler its small and medium-sized platforms and advanced, fuel-efficient powertrains. Chrysler would give Fiat some of the scale it was seeking for its platforms, joint purchasing of parts, some expertise in producing large cars, a distribution network in America and manufacturing capacity to build new Alfa Romeos and perhaps the Fiat 500 for the American market. As Mr Marchionne put it: “They have everything I don’t have (including some I will never need) and I have everything they don’t have and need.”

But Mr Marchionne’s scheme, which won the backing of the Treasury’s car-industry task-force, went further. Although Fiat would initially get only a stake of 20% (rising to 35% after fulfilling criteria set by the Treasury) and would have to repay all Chrysler’s federal loans before taking majority control, the Treasury accepted that Fiat should take over the responsibility of managing Chrysler and integrating the two operations as closely as possible.

Having presided over a near-miraculous turnaround at Fiat since being appointed in 2004, Mr Marchionne saw in Chrysler an opportunity to apply the same lessons. At Fiat he saw a sluggish organisation that lacked leadership and had become accustomed to management by committee. But he also saw, buried within the company, a new generation of leaders.

“The single most important thing was to dismantle the organisational structure,” he recalls. “We tore it apart in 60 days, removing a large number of leaders who had been there a long time and who represented an operating style that lay outside any proper understanding of market dynamics.” In their place he promoted a group of younger executives, many with a background in consumer marketing, who understood and could provide what he wanted: accountability, openness, rapid communication and impatience with hierarchy and internal politics.

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Sergio Marchionne

Some doubt that Fiat’s lean management has the resources to spread itself across Chrysler, let alone Opel too. Mr Marchionne understands the concern, but rejects it. He believes he already knows who the new leaders at Chrysler will be. He is confident that the same will apply to Opel, should that too fall into his lap.

Chrysler is essentially a done deal, although some uncertainty remains, not least because a few senior debtholders chose to push the firm into bankruptcy rather than accept the Treasury’s offer of $2.2 billion on the $6.9 billion they are owed. Fortunately for Fiat, the bankruptcy court judge, Arthur Gonzales, this week rejected the lenders’ argument that they had been treated illegally and cleared the way for Chrysler to emerge as a going concern within a couple of months. Mr Marchionne is preparing for the day: “We must act very quickly to cut overheads, lighten everything, speed up new models.”

Nor has Mr Marchionne been twiddling his thumbs in Europe. Having insisted for weeks that he had made no direct approaches about GM Europe, on May 4th he went to Berlin to present the German government with a plan that would give Fiat control of much of Opel (which includes Vauxhall in Britain) and possibly Saab, GM’s bankrupt Swedish unit. GM, which can no longer fund the lossmaking operations of its European arm, has been looking for a partner to take a majority stake in Opel since March. If it cannot find one, the German government will be loth to provide bridging finance. Fiat’s main rival is a group consisting of Magna, a Canadian car-parts and engineering business, and Oleg Deripaska, a Russian oligarch.

As with Chrysler, Mr Marchionne will have to win over both government and unions. He says that the deal depends on the willingness of European governments, but chiefly Germany’s, to stump up €5 billion-7 billion ($6.6 billion-9.3 billion) in bridging loans. In return, Mr Marchionne has promised to keep open Opel’s three main assembly plants in Germany, although there are fears for factories in Belgium and Britain. Over time he intends to reduce combined capacity by 22%, but he says he will do so by slimming factories rather than closing them. It is, he says, the preferred way in Europe—but it will mean forgoing savings of about €250m a year.

Even so, combining Opel and Fiat could save at least €1 billion a year. Partly because of Fiat’s shared history with GM, Mr Marchionne says that Opel fits perfectly. GM lacks an A platform, which Fiat has. They already share a B platform (for the Corsa and the Grande Punto) and Fiat would be happy to use Opel’s excellent new C and D platforms. “We can achieve convergence on all the big platforms by 2012. Ultimately, I need to do this with Chrysler, but Opel gets me there much faster and with more immediate returns.” Mr Marchionne adds: “I’m offering the German government a car business that will be effectively debt-free and I will take on Opel’s liabilities, including pensions. I told them: if you have a better offer, take it.”

If Mr Marchionne pulls it off, he will create a new company consisting of Fiat Auto (without Ferrari and Maserati or the rest of the Fiat Group), Chrysler and GM Europe. Among the probable stakeholders would be the Agnelli family (which controls Fiat), the United Auto Workers union health-care fund (until it cashes out) and GM. The rest of the equity would be sold in a public offering. In a normal year that combination could expect revenue of $100 billion from the sale of 6m cars—just above Mr Marchionne’s viability threshold.

Others think that amalgamating three different cultures and several less-than-stellar brands is beyond even the formidably self-confident Mr Marchionne. The tale of Mr Ghosn is not wholly reassuring. It is now pretty clear that his heroic rescue of Nissan came at the expense of taking his eye off Renault, which in recent years has produced a succession of mediocre cars. This week Martin Winterkorn, the boss of VW, pointed out that his company had been applying its vaunted platform strategy since 1992. “I wonder if he will be able to succeed,” said Mr Winterkorn, “because successfully managing several brands and obtaining true synergies is really difficult.”

Some see Mr Marchionne as an empire builder who has come to believe his own publicity. The charge exasperates him. “It’s just nonsense,” he says. “Fiat Group employs 200,000 people, but I’m going to carve out the car business and let the rest of it go its own sweet way. Look, I really hate the personal issue. It’s not about me, let’s just fix the industry. I’m only a conduit for change. You can’t just have Toyota on its own, we need this to guarantee survival. Now it’s up to others.”

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Full article and photos: http://www.economist.com/opinion/displayStory.cfm?story_id=13610819&source=hptextfeature

G.M. Is Said To Seek Stake in Fiat

Four years after paying $2 billion to extricate itself from a partnership with Fiat, General Motors is seeking a stake in the Italian automaker in exchange for its Latin American and European operations.

General Motors is eager to cede control of its money-losing Opel unit in Germany. But Fiat has also expressed interest in G.M.’s other European operations as well as its historically profitable Latin American business, though the possible terms of such a deal have not been discussed publicly.

G.M., despite its precarious financial position, now feels it has a bargaining chip with its Latin American unit, and is negotiating with Fiat over what it might get in return.

According to two people close to the negotiations, the companies are far apart. Sergio Marchionne, Fiat’s chief executive, has indicated a willingness to give up less than 10 percent of Fiat to General Motors.

But G.M. executives are holding out for at least 30 percent of the Fiat Auto Group, according to these people, who said they were not authorized to comment publicly because the discussions are fluid. A Fiat representative declined to comment on whether G.M. was seeking a stake, as did a spokesman for G.M.

The discussions are the latest development in Fiat’s multipronged bid to grow, almost overnight, into a dominant global auto company, by acquiring Opel and a 20 percent stake in Chrysler.

On Wednesday, Fiat confirmed that Mr. Marchionne would be chief executive of Chrysler when it emerged from bankruptcy, while remaining chief executive of Fiat.

Even analysts who admire Mr. Marchionne’s stamina say they question whether combining the three companies is feasible.

“You can’t get a meeting room big enough to fit all these companies together,” said Arndt Ellinghorst, an analyst with Credit Suisse in London. “A person has to sleep, and unless he’s got a strong management team, there is a significant execution risk.”

The White House has set a June 1 deadline for creditors, unions and General Motors executives to come up with a plan to avoid bankruptcy.

Besides negotiating with G.M., however, Mr. Marchionne is seeking financial aid for Opel from the German government. He was able to persuade Washington to provide billions of dollars in support for Chrysler.

The Latin American operations of G.M. could prove profitable for Fiat well before the Chrysler deal begins yielding dividends. That is why it makes sense for General Motors to negotiate a stake in Fiat, despite their tangled history, according to Philippe Houchois, an analyst with UBS.

“It lets Fiat do the hard work of scaling up Opel, while giving something valuable to G.M. in the long run,” said Mr. Houchois.

Because G.M. in Latin America is dependent on Opel for its product line, divorcing the two operations would be difficult, a fact that strengthens G.M.’s hand leading up to the June 1 deadline.

Fiat and G.M. frequently clashed during their five-year partnership, which began in 2000. Fiat engineers said G.M. was too cautious and unwilling to embrace new technology that would have created cleaner, more fuel-efficient engines. In Germany, meanwhile, Opel engineers became convinced that Fiat didn’t share its focus on detail or quality standards.

The Chrysler bankruptcy proceedings continued Wednesday with the disclosure of the names of creditors who opposed an administration-backed plan to sell nearly all Chrysler’s assets to a new company held by the United Automobile Workers union, Fiat and the United States and Canadian governments.

The list named nine investment funds, several apparently managed by the same firms, down from 20 that had criticized the sale plan while protected by a veil of anonymity.

On Tuesday, the dissident creditors, who have been criticized by President Obama as “speculators,” asked the bankruptcy judge overseeing the case, Arthur J. Gonzalez, to allow them to remain anonymous. The judge declined, observing that the comments by the president and others did not sound like serious threats.

“It’s just their opinion,” Judge Gonzalez told lawyers. “How much more is it than that?”

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Full article: http://www.nytimes.com/2009/05/07/business/global/07auto.html?hp

Plan to Sell Chrysler to Fiat Clears Bar

The judge overseeing the bankruptcy of Chrysler on Tuesday took a significant step toward allowing the sale of most of the automaker to Fiat, approving the bidding procedures advocated by the company and backed by the Obama administration.

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Lawyers for Chrysler arrived at United States Bankruptcy Court in Manhattan on Tuesday.

The decision by the federal bankruptcy judge, Arthur J. Gonzalez, is a setback for a group of Chrysler creditors who have argued that liquidation of the company or some other transaction could yield greater value. These lenders, primarily investment firms, have said that the plan for the Fiat transaction ran afoul of bankruptcy law and would chill efforts by others to produce competing, potentially higher bids.

But Judge Gonzalez disagreed, saying, “The court concludes that the bidding procedures are appropriate and necessary.”

The judge’s decision was a victory for Chrysler and the government, which together argued that a speedy sale was the only way to protect tens of thousands of jobs and help along the American economy.

“It’s a very big first step,” said Howard Seife, the head of the bankruptcy practice at the law firm Chadbourne & Parke. “It’s clear that the company is moving down the road to a Fiat sale.”

The judge’s decision was the second blow dealt to the holdout lenders during a marathon hearing on Tuesday that began mid-afternoon and ended at 11 p.m.

Judge Gonzalez earlier ordered the disclosure of identities of the Chrysler creditors, who had said making them public could lead to retaliation. A lawyer representing them claimed that the creditors had been harassed, and some had even received death threats.

Judge Gonzalez, said that their lawyers had not presented enough evidence of risk and gave the creditors until Wednesday morning to reveal their identities. The primary evidence cited by their lawyers was a set of anonymous comments on The Washington Post Web site.

In a plan worked out with the Obama administration, several Chrysler assets would be sold to a new entity held by the United Automobile Workers union, Fiat, and the United States and Canadian governments.

Corinne Ball, the lead lawyer for Chrysler, argued that there was no time to wait to solicit additional bids for the company. “It’s not perfect, and no one is saying it is perfect,” she said of the sale proposal. “But we believe we’re doing what is appropriate and necessary.”

Thomas E. Lauria, the chief lawyer for the dissident creditors, said that any time pressure for the transaction had been created by Chrysler. The company’s strategy, he said, was to file for bankruptcy after it had run out of resources.

“Then you can do whatever you want to because there’s no time to do anything else,” he said. “I’m not sure that makes a lot of sense.”

Mr. Lauria argued that the proposed sale procedures would preclude other potential bidders, although Chrysler’s lawyers said that they will consider them.

Robert Manzo, an executive with the Capstone Advisory Group who is advising Chrysler, testified Tuesday that based on an analysis he conducted in January, updated with the carmaker’s current cash levels, the company could fetch as little as nothing if it were liquidated today.

The dissident creditors said Tuesday in a filing that they hold about $300 million of Chrysler’s $6.9 billion of secured debt.

Witnesses presented by Chrysler said that the company had explored forming a corporate alliance with another carmaker, such as General Motors and Nissan, over the past two years.

Lawyers for Chrysler, a committee for its unsecured creditors and the government did agree to extend the deadline for bids for the company’s assets. A sale would still take place by the end of May.

If the judge approves the sale, “the case is pretty much over,” Scott Van Meter, managing director of LECG, a consulting firm, wrote in an email message.

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Full article and photo: http://www.nytimes.com/2009/05/06/business/06auto.html?hp

Fiat eyes new company with GM Europe, Chrysler

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Fiat Group SpA confirmed Sunday it was in talks to acquire General Motor’s European operations with the aim of possibly creating a new company to also include its newly acquired Chrysler automaker.

Combined, the new automaker would have euro80 billion ($105 billion) in annual revenues, Fiat said in a statement.

Fiat said it was evaluating the possible spinoff of its auto business to form the core of the new company. Fiat Group Automobiles includes the Fiat, Alfa Romeo and Ferrari brands.

The statement was issued on the eve of a meeting in Berlin between Fiat Group CEO Sergio Marchionne and the German economy and foreign ministers to discuss Fiat’s offer for GM’s German unit, Opel.

GM Europe also includes the British company Vauxhall and the Swedish carmaker Saab.

GM has been trying to find investors for its noncore and unprofitable assets as part of a restructuring in which it has sought billions of dollars in aid from the U.S. government to avert collapse.

Opel has said it needs euro3.3 billion ($4.3 billion) to get through the economic crisis. The German government has said it doesn’t foresee giving direct state aid. Chancellor Angela Merkel has suggested the government could help an Opel investor with loan guarantees.

Fiat said that over the next few weeks, Marchionne will be looking “to assess the viability of a merger of the activities of Fiat Group Automobiles (including the interest in Chrysler) and General Motors Europe into a new company.”

“As part of this process, the group would evaluate several corporate structures, including the potential spinoff of Fiat Group Automobiles and the subsequent listing of a new company which combines those activities with the activities of General Motors Europe.”

In an interview Sunday with Corriere della Sera, Fiat Chairman Luca Cordero di Montezemolo called GM’s Opel an “ideal partner” and a possible takeover by Fiat an “extraordinary opportunity.”

Fiat is not the only suitor for Opel, however. Last week, Canadian car parts maker Magna International Inc. presented German Economy Minister Karl-Theodor zu Guttenberg with what the minister called a “rough concept for a commitment with Opel.”

Guttenberg has said the German government would wait to determine its role in any full or partial Opel sale until after the U.S. government had weighed in.

Fiat, meanwhile, has pressed ahead with a takeover of Chrysler, with attorneys for the U.S. auto manufacturer saying the company would file a motion to sell substantially all of its assets to the Italian automaker.

In addition to Fiat Group Automobiles, the Fiat Group also includes its agricultural vehicles branch CNH and its Iveco trucking unit, as well as a media arm.

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Full article and photo: http://www.washingtonpost.com/wp-dyn/content/article/2009/05/03/AR2009050301332.html?hpid=topnews

Chrysler Partners Have Many Goals

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In assuming control of Chysler, Fiat would bring a great deal of experience with smaller cars, and would gain the use of Chrysler’s North American manufacturing facilities. The Italian automaker will provide technical operations, and build at least one vehicle in a Chrysler plant. Fiat did not put up any financing as part of the agreement.

Before Chrysler can start building cars that more Americans want to buy, it will have to overcome considerable challenges.

The biggest may be persuading its three principal new owners — the retiree benefit fund for the labor union that President Obama himself has identified as a contributor to the company’s decline; a government that insists it will keep its hands off day-to-day decisions; and a foreign car company, Fiat — to innovate in ways the carmaker has resisted for three decades.

There is reason for skepticism. For all the optimism expressed by the administration about a downsized, leaner Chrysler, the structure of the new Chrysler sets the stage for a conflict between current workers and retirees.

Chrysler’s workers, of course, are desperate to preserve their job security, their wages and their generous health care benefits, built up over years of negotiations. But it is Chrysler’s retirees who will hold a seat on the new company’s board, representing the interests of a dwindling — and expensive — retirement health plan.

“There’s a potential conflict there, absolutely,” one of Mr. Obama’s aides conceded Thursday.

The innovative element of the new company is supposed to come from Fiat, the Italian automaker that managed a remarkable turnaround in the last five years. Fiat turns out fuel-efficient engines and sporty, economical small cars — exactly the image of the future American car industry that Mr. Obama talks about in glowing terms.

But when Chrysler was controlled by Daimler-Benz, one of Europe’s most successful luxury carmakers, everyone hailed the potential of great crossborder synergies. They simply never materialized.

Members of the team that negotiated the deal insisted on Thursday that they had explored all those risks as they revamped Chrysler and faced down a group of recalcitrant lenders who, on Wednesday night, balked at taking a deal that would give them about 28 cents for every dollar they had lent the company over the years.

The United Automobile Workers will not be managing the company the way unions tried, and failed, to manage United Airlines, they said. Moreover, Fiat is not Daimler — it is geared toward small, midmarket cars, not fine driving machines with wood-burl dashboards, they added.

Mr. Obama is trying to portray the government’s role as more venture capitalist than manager.

“I’m not an auto engineer,” the president declared Wednesday evening during the news conference marking his 100th day in office. “But I know that if the Japanese can design an affordable, well-designed hybrid, then doggone it, the American people should be able to do the same.”

In fact, in Chrysler’s case, he is relying on Italian technology — Fiat technology — to do what Chrysler has been unable to do itself. And while the White House doesn’t want to advertise that fact as Chrysler embarks on its latest last chance, the plan is for Chrysler to ultimately be a subsidiary of Fiat, in a turnabout of fortune like those in the early days of the auto industry, when giants were consumed by faster-moving competitors.

The plan announced Thursday creates incentives for Fiat to obtain a majority share of its troubled American partner, step by step. Fiat’s stake is supposed to rise in 5 percent increments, if it satisfies each of three milestones: It must expand Chrysler’s market beyond North America by putting Chrysler’s popular Jeeps on car lots in places like Brazil and Italy; it must begin to produce high-performance engines in old Chrysler factories; and it must produce a car that can get 40 miles to the gallon.

The entire venture will be overseen by a new board, including four directors appointed by the president — some of whom, it appears, have already been approached about the job.

Mr. Obama insists that beyond appointing those directors — mostly “experienced C.E.O.’s,” one administration official said — Washington will keep its hands off. But he cautioned that “every dime of new taxpayer money will be repaid before Fiat can take a majority ownership stake.”

That “new money” amounts to about $8 billion in loans, including the cash to pay off Chrysler’s lenders. The federal government has already extended about $4 billion to keep the company afloat in recent months.

The plan faces another potential hitch: that 40-mile-a-gallon car, according to administration officials, probably will not be for sale in the United States until 2012. If the Secret Service can be persuaded, Mr. Obama could tool around in it as he campaigns for re-election.

That means the government, the unions and Fiat must find a way to keep Chrysler afloat for two and a half years, in the worst car market in memory and with offerings that Mr. Obama himself described Thursday at the White House as “less popular, less reliable and less fuel-efficient than foreign competitors’.” Presumably, they will keep that ringing endorsement out of the company’s advertisements.

At General Motors, the events about to unfold are even more complex. While the United States government will hold only about 7 percent of Chrysler’s shares, it will very likely end up with 55 percent of G.M., once the world’s largest carmaker.

And while Mr. Obama says he neither wants to dictate car models nor run the companies, their success or failure will be viewed, rightly or wrongly, as his success or failure as the auto executive he says he never wanted to be.

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Full article and photo: http://www.nytimes.com/2009/05/01/business/01assess.html?hp

Chrysler Bankruptcy Plan Is Announced

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President Obama spoke on Thursday about Chrysler seeking bankruptcy protection and its alliance with the Italian automaker Fiat.

Chrysler, the third-largest American auto company, will seek bankruptcy protection and enter an alliance with the Italian automaker Fiat, the White House announced Thursday.

The bankruptcy case, which officials envisioned as a swift, “surgical” process, was set to be filed in United States Bankruptcy Court in New York. It marks the first time a major American car company has tried to restructure under bankruptcy protection since Studebaker in 1933.

President Obama announced the plan, including the Fiat alliance, in televised remarks shortly after noon. He said the outcome was a much better outcome than seemed likely only a month ago.

A senior White House official said that the bankruptcy case would begin immediately, and that the government would provide debtor-in-possession financing in a range of $3 billion to $3.5 billion, so the company can continue to operate normally.

Once Chrysler restructures, the company would receive $4.5 billion in financing to restart its operations, for total American government support through the bankruptcy process and afterwards of up to $8 billion.

That is $2 billion more than Mr. Obama initially said the company would receive if it successfully reached a deal with Fiat.

Chrysler has already received $4.5 billion from the government, under a bailout plan put into effect by the Bush administration in late December, after Congress rejected legislation that would have provided federal aid.

The Canadian government also is expected to provide $1 for every $3 in American support, the official said, meaning Chrysler could receive another $2.6 billion.

Government officials estimated that the case could be as short as 30 to 60 days, although bankruptcy cases normally take much longer. The end result would be a new version of Chrysler that would emerge from bankruptcy without liabilities, such as debt and legal obligations, faced by the company now.

At the same time, Chrysler and Fiat signed an agreement that calls for Fiat to take part in running Chrysler. The Italian automaker will provide technical operations, and build at least one vehicle in a Chrysler plant. Fiat did not put up any financing as part of the agreement.

A new board will be appointed to run Chrysler that is expected to include representatives from both companies and the United Automobile Workers union. Chrysler’s chief executive, Robert L. Nardelli, is expected to leave the carmaker.

The bankruptcy filing could serve as a preview of what a filing by General Motors might look like. G.M., which like Chrysler received federal assistance last year, faces a June 1 deadline for its own restructuring.

President Obama had set a Thursday deadline for Chrysler to conclude a deal with Fiat, and to resolve issues with the United Automobile Workers union and its creditors.

On Wednesday, union members approved contract changes with Chrysler that will mean pay and benefit cuts, and their contract is expected to remain in effect during the bankruptcy. “No judge is going to override that kind of support,” the administration official said.

But Chrysler and the Treasury were unable to reach agreements with all the holders of $6.9 billion in company bonds. A number of investment funds balked at a government offer to pay $2.25 billion in cash for the debt, an offer that was sweetened after four major banks agreed to an earlier offer of $2 billion.

White House officials said the failure to reach agreement with lenders was the reason why President Obama decided Chrysler should go through the bankruptcy process.

However, dealing with the leaner Chrysler will also benefit Fiat.

White House officials said some of Chrysler’s 3,600 dealers in the United States are expected to close, and Chrysler Financial, the company’s lending arm, will cease providing loans for new Chrysler cars and trucks. Instead, GMAC, the financing arm partially owned by General Motors, will take over lending to Chrysler dealers.

The administration said it did not expect significant white or blue-collar job cuts as a result of the bankruptcy. Chrysler suppliers also can expect their contracts will be honored, although the company would have the right under bankruptcy protection to cancel them.

Last-minute efforts by the Treasury Department to win over recalcitrant Chrysler debtholders failed Wednesday night.

An administration official said the government had the “full support of Chrysler’s key stakeholders” in its efforts to restructure the company and expressed confidence about Chrysler’s prospects for emerging stronger. But the official, who declined to speak for attribution ahead of President Obama’s announcement, made it clear that the administration was frustrated with the holdout creditors.

A group of Chrysler’s secured lenders fired back, saying that the administration was skirting bankruptcy laws by forcing them to take a larger loss on their debt than other stakeholders in the company. They said their proposals to restructure Chrysler had been ignored by the government.

“The fact is, in this process and in its earnest effort to ensure the survival of Chrysler and the well-being of the company’s employees, the government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades,” the group, which calls itself the Committee of Non-TARP Lenders, said in a statement.

Members of the committee include units of Oppenheimer Funds, Perella Weinberg Partners’ Xerion Capital Fund and Stairway Capital Management. The funds emphasized that their investors are major pension funds, teachers’ unions and school endowments.

The lenders said they have been forced to negotiate through a group of big banks that have accepted government bailout money and are reticent to push back against the government’s proposal. They are particularly upset that the United Auto Workers will receive more for their debt even though the secured lenders should legally be paid before the union.

Many of the holdout lenders, primarily distressed-debt hedge funds who bought portions of Chrysler’s $6.9 billion of bank debt at a discount, are likely to argue that they have the first claim to the carmaker’s assets that were pledged for those loans, according to people briefed on the matter.

They argue that they would see greater recovery in a liquidation of the car giant, which they contend would yield about 65 cents on the dollar. The most recent plan proposed Wednesday by the Treasury Department and Chrysler’s four main bank lenders — JPMorgan Chase, Citigroup, Morgan Stanley and Goldman Sachs — would have given the creditors about 33 cents on the dollar.

The four big banks own 70 percent of Chrysler’s secured debt.

As the talks with Fiat and the lenders entered the final hours, members of the United Automobile Workers union approved a historic deal in which the union would take a 55 percent stake in Chrysler. The stake would finance half of a new trust to administer retiree health care costs.

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Full article and photo: http://www.nytimes.com/2009/05/01/business/01auto.html?hp

Chrysler and Union Agree to Deal Before Federal Deadline

Union leaders said Sunday that they had reached an agreement with Chrysler that meets the federal government’s requirements for the automaker to receive more financing.

The deal also includes Fiat, the Italian automaker with which Chrysler was ordered by the government to form an alliance before Thursday.

Neither the United Automobile Workers union nor the company released details of the agreement, which modifies the union’s 2007 contract and reduces the amount of money Chrysler must pay into a new health care fund for retirees.

The union plans to have its 26,000 Chrysler workers vote on the deal by Wednesday.

“We recognize this has been a long ordeal for active and retired auto workers, and a time of great uncertainty,” the union’s president, Ron Gettelfinger, said in a statement. “The patience, resolve and determination of U.A.W. members in these difficult times is extraordinary, and has made it possible for us to reach the agreement we will present to our membership.”

Chrysler said the agreement, reached during marathon negotiations over the weekend, satisfies the requirements laid out by the Obama administration for a deal by an April 30 deadline.

Chrysler, which has received $4 billion in federal loans, is in the final stages of a reorganization process ordered by the government, which includes a mandate to provide financing for half of all union retiree health care using company stock.

“The provisional agreement provides the framework needed to ensure manufacturing competitiveness and helps to meet the guidelines set forth by the U.S. Treasury Department,” Chrysler said in a statement Sunday night.

The tentative deal with the union also paves the way for a global alliance between Chrysler and the Italian automaker. “As a result, Chrysler can continue to pursue a partnership with Fiat,” Chrysler said.

Meanwhile, the Canadian Automobile Workers union said Sunday that its members had ratified a cost-cutting deal covering 8,000 Chrysler workers in that country. The deal, which is expected to lead to similar cuts for Canadian workers at General Motors and Ford Motor, cuts workers’ benefits, reduces time off and creates a health care trust for retirees. The union said 87 percent of its members voted in favor of the deal, even though the union’s president, Ken Lewenza, described the negotiation process as “torturous and unfair.”

Mr. Lewenza said, “The high acceptance of this agreement is a recognition that although workers did not cause this crisis, we all have an interest in maintaining good jobs and ensuring the auto industry remains central to the overall Canadian economy.”

The union deals increase pressure on Chrysler’s lenders to come to an agreement to reduce the automaker’s $6.9 billion in secured debt. The lenders, a group of banks and hedge funds led by JPMorgan Chase, are still in talks with Treasury officials over terms of a debt-for-equity exchange to eliminate at least two-thirds of the debt.

On Sunday morning, before the union deals became public, President Obama’s economic adviser, Lawrence H. Summers, said that the White House remained optimistic about Chrysler’s ability to restructure without having to resort to bankruptcy protection.

“We’re hopeful that the negotiations, which have been proceeding with great energy, are going to conclude successfully,” Mr. Summers said on “Fox News Sunday.” “There are some issues that remain to be worked out, but it’s in everybody’s interest to see these negotiations succeed and we’re hopeful that they will.”

In February, Chrysler said bankruptcy would most likely result in the liquidation of the company. But since then, the company has signaled that it could file for bankruptcy protection without having to shut down.

“My sense is that it’s not liquidation, that it would be a reorganization,” a Detroit-area Chrysler dealer, Carl Galeana, said Sunday. “I just think a shutdown of a corporation this size, in this economy, would be devastating.”

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Full article: http://www.nytimes.com/2009/04/27/business/27chrysler.html?hp