Top Business Negotiations of 2013: Fiat’s Pursuit of Chrysler

By — on / Business Negotiations

In 2009, when Chrysler on the verge of financial collapse, the Treasury Department negotiated a swift solution to save it from extinction. Chrysler would go into bankruptcy, and then its ownership would be divided up, with the majority going to a Chrysler union workers’ health-care trust, 20% to Italian automaker Fiat, 10% to the U.S. Treasury Department, and 2% to the Canadian government. Chrysler also gave a $4.59 billion note to the health-care trust to eliminate the company’s future health benefit obligations to retirees. And Fiat negotiated a plan to eventually acquire all of Chrysler by gradually buying the health-care trust and the U.S. government’s stake in Chrysler.

At the time, the deal was considered to be a bargain for the U.S. government, which spent $8.5 billion in taxpayer dollars on the bankruptcy.

A few years later, the deal looks less rosy. Chrysler has turned itself around financially and is preparing for an initial public offering. Meanwhile, Fiat is struggling in the face of an economic downturn in Europe.
Acquiring Chrysler now has become Fiat’s best hope of staying solvent. Fiat acquired the U.S. and Canadian governments’ stakes in Chrysler for $640 million in 2011.

But when Fiat attempted to begin buying the health-care trust’s stake in Chrysler, the voluntary employee beneficiary association, or VEBA, and Fiat reached drastically different calculations of Chrysler’s value. The difference in opinion is being hashed out in the Delaware courts.

According to Steven M. Davidoff of the New York Times’ “DealBook,” the dispute can be chalked up to “a $4.5 billion drafting error.” When hastily drawing up their contract to save Chrysler, Justice Department lawyers failed to specify whether the $4.59 billion dollar note issued to the health-care trust should be calculated when determining the value of Chrysler.

The error points to the risks involved in negotiating deals on the fly. Business negotiators would be wise to resist pressures put on them to wrap up a deal in a hurry.

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