Cerberus Capital Management LP, wading into the politics of a U.S. auto-industry bailout, would give up any profit on a future sale of Chrysler LLC should the company receive federal financial aid.

Chrysler also expects the U.S. government to take a stake in the company in any rescue, CEO Bob Nardelli said yesterday. Federal backing for a merger between Chrysler and General Motors Corp. was discussed before GM ended talks last week, people familiar with the matter said.

The no-profit pledge may help ease opposition in Congress to helping the industry, because Cerberus is a buyout firm. Cerberus founder Stephen Feinberg “has basically gone on record saying he would forfeit” profit from a sale under a bailout, Nardelli said at a conference in Palm Desert, California.

“This is a sign they need the money and are willing to do anything to get it,” said Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan. Taxpayers won’t want to let “a private-equity fund reap the profit,” he said.

Chrysler, which isn’t required to report financial results, has indicated it lost at least $1.08 billion in the first half. Cerberus acquired 80.1 percent of the automaker from Daimler AG in 2007 for a $7.4 billion investment, about a fifth of what the Germany company paid for Chrysler nine years earlier.

Source: Bloomberg

First, I want to point out that most mergers in history are not successful.  Second, I would like to point out that most mergers happen between a company that is doing well and a company that is doing poorly or between a company that is doing well and a company that is doing ok.  I can’t recall any merger, especially a successful one that happened between two companies that are bleeding money.

Second, the talks surrounding the merger are not yielding much information, though various news outlets have quoted sources.  So most of what we think we know is speculation of some kind.  With that in mind I would like to add my speculation to the mix.

From most of the reports coming out of Chrysler (and I watch the company closely) it would seem that Chrysler is well on it’s way to becoming profitable all on its own.  Every time Nardelli or Press talked about Chrysler they said that they were meeting and exceeding their goals for becoming profitable.  Then the credit market seized up and a lot of things went out the window.

I believe that the guys at Cerberus think they know how to make any company profitable, and that includes automakers.  They took a look at GM and saw that GM was bleeding money fast and is in a tough position.  This makes them an easy target.  And why not?  Cerberus already owns one american automaker, combine the two and make them profitable and now you have a much bigger piece of the pie.

From there Cerberus must have done a study to find out what brands in a proposed company would be the most valuable.  They find out that the Chrysler brand itself is one of the brands that needs to go, so they can’t position the merger as Chrysler buying out GM.  It would look silly to have Chrysler buy GM and then shut down the brand that the company is named for.  So it needs to be positioned as GM buying out Chrysler.

This also helps out Cerberus by making GM the bad guys.  The only way to make the combined company work is to cut all redundant staff.  If it’s GM doing the buying and the cutting Cerberus comes out of this a lot cleaner than if Chrysler buys out GM and kills the staff.

There are reports that Cerberus (from the company itself) wants to have a stake in the combined automaker.  This would seem to support the idea that they want to combine the automaker and have a bigger piece of the pie.  Since Cerberus would probably be the biggest stock holder in the company they would get to cherry pick the board members that they want.  There are conflicting reports on this, Cerberus denies that they would can any of the GM board members, but most of the GM board seems pretty cool to the idea of a merger.  Why wouldn’t they if their jobs are gone after the merger?

Overall I see this as Cerberus seeing an opportunity to own a large portion of the biggest automaker in the world.  They think they can reduce costs by cutting redundant workers and improve the image and quality of their cars.  I think they’re biting off more than they can chew.

Renault-Nissan has a presence in the US market through Nissan, but it’s a small one.  The company has been looking for a partner in the US for some time now, they’ve proposed alliances with GM in the past.  Now, at a time when Cerberus seems like it wants to get out of the car business and has been pushing for a GM/Chrysler buyout/merger Renault-Nissan is proposing to buy 20% of Chrysler.

The two companies are already partnering on vehicles.  Nissan will make a small car for Chrysler and in return Chrysler makes the Nissan Titan and provides Nissan with Heavy Duty trucks as well.

It’s believed that Cerberus would prefer a GM/Chrysler buyout, but so far that deal seems to be halted without any avenue to get financing for the deal.  GM would need to raise a lot of cash to buyout Chrysler workers, and they can’t find a bank willing to lend it to them.

Carlos Ghosn, CEO of both Renault and Nissan has publicly denied any kind of merger as recently as July, but things have changed a lot since then.  He also states that he’s against buying up companies.

“I think that when people talk about consolidation, they imagine company A buying company B. We know this does not work,” Ghosn said at a grand opening celebration of the company’s new North American headquarters in Nashville, Tenn. “Company A buying company B is guaranteed destruction of value after a while.”

And so far he’s practiced what he preached.  Renault owns a 44% stake in Nissan and Nissan owns a 15% stake in Renault.  With both companies sharing many parts under the hood to reduce costs but otherwise remain autonomous of each other.  The only link other than the parts sharing is Ghosn himself, as he’s the CEO of both companies.

Source: Detroit Free Press

While I would prefer Chrysler remain independent I would also concede that Renault is wildly preferable as a buyer of Chrysler than GM.  Renault would keep Chrysler intact while GM would burn it to the ground keeping only bits and pieces.

Reuters is reporting that Cerberus Capitol Management is not looking to sell it’s stake in Chrysler.  Rather it would like to buy up a portion (or all) of whomever they make their deal with to combine the two automakers.

“Cerberus executives have maintained repeatedly that they believe in the industry. They expect to be there for the long term and want to do all they can to position Chrysler for the future,” a source said.

Chrysler has seen sales slide 25% this year alone, a higher percentage than the auto industry as a whole.  It remains a hot topic for automotive reporters to speculate on.  No one quite knows what the future of Chrysler is and with the company being silent to the press it’s an easy target to fill a column with.

Cerberus recently had talks with General Motors about a potential merger.  But according to a source the talks never consisted of giving up any of their stake in Chrysler.  Nor would they swap it for GMs stake in GMAC.

“Cerberus is not dumping Chrysler or simply swapping it for an increased share in GMAC. That deal was not discussed and they have no interest in it,” said the source, who declined to be identified.

“In any business combination with GM or anyone else Cerberus would look to come out on the other side owning a meaningful stake in the combined auto company,” the source said.

I guess with the auto industry in shambles it makes sense for the guys with all the cash to come in and scoop up some of the mess for pennies on the dollar.  The upside would be too hard to ignore.

Cerberus Capitol Management owns an 80.1% stake in Chrysler.  The deal between Daimler and Chrysler left Daimler with 19.9% in Chrysler.  It would seem that Cerberus thinks that Chrysler is well on it’s way to becoming profitable and they don’t want to share any of that profit with Diamler, Cerberus wants to buy the remaining 19.9% from Daimler.  From a Chrysler Press release:

Chrysler LLC confirms that Cerberus Capital Management, LP has approached Daimler AG about the possible redemption of its 19.9 percent stake in Chrysler Holding LLC. Cerberus and Daimler are currently in discussions.
In the event of a successful transaction, common projects between Daimler and Chrysler in the areas of research and development and advanced technologies would continue.

Since the guys running Daimler are pretty business savy I’m sure they’ll be eager to sell their remaining 19.9% to Cerberus.