Chrysler enters bankruptcy, merges with Fiat

In the multiple-choice survival test, Chrysler studied hard and it ultimately took an “All of the Above” approach. Today, Chrysler and President Obama announced the company would both: declare Chapter 11 bankruptcy and join with Italian partner Fiat.

The partners announced that a new company will emerge phoenix-like from the Chrysler Corp. ashes, with its autoworkers’ Voluntary Employee Beneficiary Association (VEBA) owning 55 percent. (It is ironic that the same union workers who were blamed for some cost problems will be the majority shareholders...) Fiat will initially hold a 20 percent ownership stake in Chrysler (without shelling out one single Euro), which may be expanded as government loans are repaid. In the meantime, the U.S. and Canadian governments combined will have a 10 percent stake.

The new deal “will provide a new lease on life for Chrysler,” President Obama said.

The President says he expects the bankruptcy process to be as quick as 30 to 60 days, although a judge could decide to extend that timeframe.

To arrive at this point, Chrysler worked to reach the agreements and concessions required by President Obama and his Automotive Task Force to meet today’s deadline for a revised viability plan. In the end, it was determined Chapter 11 bankruptcy would allow the refinancing and restructuring needed for Chrysler to one day achieve profitability, and the Task Force said that goal can only be accomplished through a strategic alliance with Fiat. Chrysler Chairman and CEO Bob Nardelli is expected to step aside when this phase is complete, returning to Cerberus Capital Management as an advisor.

Starting May 4th, most manufacturing operations will be temporarily idled, though they are expected to resume in 30 to 60 days once the dust has settled and a new company emerges.

The merger and bankruptcy comes just a few months shy of 30 years after Lee Iacocca saved Chrysler by winning government loan guarantees, on Sept. 7, 1980. 

In March, Obama gave Chrysler 30 days to complete a merger with Fiat to receive more government loans that would have allowed the company to remain solvent. But the deal foundered over the value of bonds that allowed Cerberus Capital Management to acquire Chrysler from German automaker Daimler in 2007. 

Fiat has indicated it is willing to follow through with the merger even with Chrysler in bankruptcy.

Under the Fiat merger Chrysler is expected to sell the company’s Fiat 500 (Cinquecento) and Alfa-Romeo Mito. We also hear that it might base its next-generation Caliber on the Fiat Punto and that the next Sebring might also be based on a Fiat platform. These small European models would neatly complement a product line biased toward large cars and trucks, allowing the company to meet future U.S. fuel economy requirements. Through the partnership, Fiat is expected to provide technology to Chrysler to accelerate its competitiveness. In exchange, Fiat gets access to the North American market, which it abandoned in 1982. (Read: "Meet the Press.") And in a twist, GMAC is to become the preferred lender for Chrysler dealer and consumer business, rather than Chrysler financial, which is also insolvent since the government refused it more aid.

We hope that this new setup indeed, gives Chrysler more competitive models and a fresh outlook.

What does this mean for you?

• If you own a Chrysler product, there is government-backed warranty protection during the restructuring period. 
• The marriage between Chrysler and Fiat will produce vehicles that give consumers more choices.
• Consumer Reports currently does not recommend any Chrysler, Dodge, or Jeep products based on performance in our tests and predicted reliability. (Read: "Detroit report card.")

We will continue to monitor this fast-moving story, reporting here in the Cars blog and also updating advice and news on the Auto Crisis hub.

—Eric Evarts

Comments

[fresh start auto loans]

This would help Chrysler to emerge more stronger and more powerful.

[Bill]

Fiat was previously nearly run out of this country for producing unreliable cars with poor service. It remains to be seen that things will be any different this time.

[Thomas DI PIETRO]

In the past 25 years FIAT has evolved into a respected, credible brand in Europe. During that time U.S. consumers have become much more oriented to the Italian market in the areas of design and fashion. FIAT's return will bring more of the "Made in Italy" quality to the American market. And that is a good thing --for Chrysler, for FIAT, and for the USA.