Chrysler and Fiat finally form global strategic alliance

Bankruptcy is the word of the day for Chrysler, but 'merger' will soon be replacing it. The whole bankruptcy process is being pushed forward quickly to eliminate the remaining obstacles between Chrysler's viability and the Fiat merger. President Obama's speech today reflected this path, confirming both that bankruptcy is the only way forward, and that his task force finds a joined Fiat-Chrysler alliance to be viable.

"Over the past month, seemingly insurmountable obstacles have been overcome," the President said during his speech. "Chrysler and Fiat have formed a partnership that has a strong chance of success."

The combination of Fiat's alliance and a speedy bankruptcy means that sales won't be interrupted. Even warranty service will go forward, complete with a guarantee by the U.S. government. The Treasury will also be lending Chrysler an additional $7.5 billion to help it negotiate the waters of bankruptcy.

Between $3-$3.5 billion will come in the form of 'debtor-in-possesion' (DIP) financing, and another $4.5 billion will come as 'exit financing' to enable Chrysler to continue operation post-bankruptcy. Fiat will only be able to take control of Chrysler after the $7.5-$8 billion in loans have been repaid.

Following the bankruptcy process, Chrysler CEO Robert Nardelli will step down, while co-President Tom Lasorda plans to retire.

Part of the plan includes new government capital for GMAC, which has agreed to finance new Chrysler vehicles, though Chrysler is planning to idle a most of its plants during the 30-60 day bankruptcy itself. Existing stock should meet demand in the mean time, however it will further endanger the supplier base. The Small Business Administration will also be expanding its loans process to help industry suppliers remain afloat to help mitigate that danger, however.

The Fiat-Chrysler alliance is thought to be worth more than $10 billion for the struggling Detroit company and could potentially save more than 5,000 North American manufacturing jobs. As CEO Bob Nardelli described it in an email earlier this month, the value of the deal is “equal to or greater than the total amount of loans" that Chrysler is seeking from Congress.

"This partnership transforms Chrysler into a vibrant new company with a wealth of strategic advantages,” said Nardelli. “It enables us to better serve our customers and dealers with a broader and more competitive line-up of environmentally friendly, fuel-efficient high-quality vehicles. Benefits to the new company include access to exciting products that complement our current portfolio, technology cooperation and stronger global distribution."

Fiat's Sergio Marchionne was equally optimistic. "Our work is just beginning, but together with our new partners at Chrysler we look forward to delivering on the vast potential this alliance holds and reintroducing to North American customers of some of our most popular brands, including Alfa Romeo and the award-winning Cinquecento."

Fiat will initially hold a 20% ownership stake in Chrysler. Fiat will have the right to increase its ownership stake an additional 15% in three increments as it meets the following criteria: 5% for bringing a 40mpg vehicle platform to Chrysler to be produced in the U.S.; 5% for providing a fuel-efficient engine family to be produced in the U.S. for use in Chrysler vehicles; and 5% for providing Chrysler access to its vast global distribution network to facilitate the export of Chrysler vehicles.

"To be sure, there will be many changes as we move forward to implement our plans," said Nardelli. "But today, from many great parts, we begin to build a vibrant new company with less debt, a stronger balance sheet, richer product portfolio, supported by a well-positioned finance company.”