Chrysler Retools with New Owners and Soon, a More Fuel-efficient Lineup

Chrysler is turning to Chapter 11 to survive in hopes the dramatic move will be a brief pit stop lasting 30-60 days while it creates a new company, with new priorities and new owners.

Under the protection of court supervision, Chrysler plans a quick financial — and a longer production –reorganization that will likely face immediate challenges from disgruntled creditors and dealers. If it prevails, as most observers expect, the new Chrysler will be 55% owned by the United Auto Workers (UAW) and a UAW health care trust, with 20% of the new company shares going to Fiat, the Italian carmaker.

Chrysler CEO Bob Nardelli and President Tom LaSorda announced they are leaving the company, and it was understood that Sergio Marchionne, Fiat’s CEO, would either become CEO of the new Chrysler or appoint a successor to Nardelli.

With the restructuring plan, Fiat can increase its equity to 40% under certain conditions (including production of a 40-miles-per-gallon car) and could eventually gain majority control of the company. Though it brings no cash to the deal, Fiat says it is contributing billions of dollars worth of new technology, including technologies for producing fuel-efficient engines.

Eight percent of the company will belong to the U.S. government, while the governments of Canada and the province of Ontario will hold 2%. The balance belongs to remaining shareholders, though Cerberus Capital Management LP, which gained control of the company in 2006 with a $7.4 billion investment, will lose all of its equity.

Chrysler will continue to sell cars through its dealerships, but all plants will close for 30-60 days during the reorganization.

Meantime, many observers believe that General Motors, though not in quite as bad financial shape as Chrysler, will also be forced into Chapter 11 in the near future.

To read more Knowledge at Wharton coverage of Chrysler and other auto makers, see:

Is Chrysler Worth Saving?

Changing Course: The Chrysler Deal, Rising Gas Prices and Other Car Talk

Driving Lessons: Dieter Zetsche's Experiences behind the Wheel of Daimler-Chrysler and Beyond

The U.S. Auto Industry: Dangerous Curves Ahead?

Behind the Curve: Have U.S. Automakers Built the Wrong Cars at the Wrong Time — Again?

On the Skids: Are U.S. Automakers Running Out of Time — and Options?

Is Chrysler Worth Saving?