To save money and ready itself for a possible sale, Chrysler and its owner Cerberus Capital will cut 5,000 white-collar workers

Chrysler Chairman and CEO Robert Nardelli pulled out the ax, telling employees in an e-mail on Oct. 24 that he will cut up to 5,000 white-collar jobs, or 25% of the workforce, with early retirement deals and buyout offers.

The moves come as Chrysler is struggling to reduce its cash burn and while its owner, Cerberus Capital Management, is discussing merger or sale deals with both General Motors (GM) and Renault-Nissan (NSANY).

For Chrysler, the moves are aimed at weathering a weak economy that has sent sales down 25% this year and cleaning the company up for a sale, analysts say. "In Chrysler's case, it's both," says HIS Global Insight analyst John Wolkonowicz. "It's just the beginning. Depending on how long the downturn is, the American carmakers will delay new-vehicle programs and lay people off."

To ease the pain, Nardelli said in the e-mail that Chrysler will enhance the benefits of workers being laid off or accepting buyouts. They will get bigger cash payments and new-vehicle vouchers. In the e-mail, Nardelli said: "These are truly unimaginable times for our industry. We continue to be in the most difficult economic period most of us can remember." The voluntary departures are to start in November and will be completed by the end of that month. If Nardelli doesn’t get enough volunteers, there will be forced layoffs. The whole cut program will be done by the end of 2008.

Burning Through Cash

The cuts also come after former parent Daimler (DAI), which still owns 19.9% of Chrysler, said that the Michigan auto company lost $660 million in the fourth quarter.

While in early August the carmaker made $1.1 billion in earnings before interest, taxes, depreciation, and amortization, Chrysler CFO Ron Kolka said in an interview (BusinessWeek, 8/1/08) with BusinessWeek shortly after the announcement that the company still lost money on a net basis and burned through cash in the first half.

Meanwhile, sources close to discussions between Cerberus and GM say that talks are ongoing and the two sides hope to reach a decision whether or not to strike a deal by early November. The talks have focused on merging Chrysler's auto business into GM (BusinessWeek, 10/17/08), with Cerberus keeping a minority stake.

In exchange, Cerberus would get a bigger stake in GMAC Financial Services. Right now, Cerberus owns 51% of GMAC, and GM owns the rest. If a deal is struck, GM would have a smaller stake in the lender, and Cerberus would likely merge it with Chrysler Financial Services to save money through consolidating the companies.

Sources close to talks say the remaining hurdles are how much new cash goes into the combined auto company, how it is raised, and what size stake GM would keep in GMAC.

Cerberus has also been talking to Renault-Nissan about deals. Analysts say that could either be a backup plan if the GM talks fail, or Renault-Nissan could buy some of the Chrysler assets that GM doesn't want. "There's nobody out there for whom acquiring all of Chrysler makes sense," Wolkonowicz says. "This deal will be done very creatively."

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