Cerberus & Chrysler: After The Buyout

Back in May, I wrote this piece concerning the then-imminent buyout of Chrysler from Daimler Benz by private equity shop Cerberus.

The topics were many, but I ended the post thusly,

"Then there was the editorial in the Journal extolling private equity for taking a risk on Chrysler, so taxpayers would not, once again, be forced to do so. I guess there is some sort of benefit to this, in an indirect way. But I still have the sinking feeling that Schumpeter would have preferred to see the number three Detroit auto company just close up shop with its current losses, rather than prolong the pain and bleeding.

The fact that the various deals mentioned in the Journal's article, mentioned above, reminds us that, in prior years, other very intelligent and experienced people entered into some ill-advised transactions. Not every sector-restructuring deal ends happily and profitably.

If I had to bet, I would bet that the Chrysler-Cerberus deal will not meet the latter's expectations for ultimate profit and disposition of the assets it is buying."

Now comes Friday's Wall Street Journal article entitled "Cerberus' Rocky Road." In it, the authors wrote,

"But now, the flagging fortunes of two of its biggest acquisitions -- Chrysler LLC and GMAC LLC -- and its sudden withdrawal from a $4 billion deal to acquire United Rentals Inc. have left open the question of whether the investment fund has stumbled.

Struggles at Chrysler also have raised questions about whether the firm should have invested in the car maker. Facing the prospect of a difficult 2008 for U.S. auto makers, Chrysler has retrenched. In November, the company announced it would cut 11,000 jobs on top of the 13,000 that had previously been planned and eliminated shifts at five plants.

Late last year, Chrysler's new chief executive told employees the car maker was "operationally" bankrupt. Mr. Neporent said Chrysler CEO Bob Nardelli was trying to rally them to action, perhaps with a poor choice of words.

Cerberus said Chrysler has ample liquidity and isn't only meeting but, in many cases, exceeding its financial targets. Mr. Neporent said the firm remains "extremely enthusiastic" and had anticipated the car maker's losses. He said it was too early to judge the success of the deal, and it will take years before one can judge their strategy.

Doubts about Cerberus's strategy have intensified in recent months as it has backed away from a string of deals."

I suppose it's too early to declare Cerberus' Chrysler purchase a failure. And with their cloak of private equity, nobody really knows just how close to, or far from, financial and operational performance plans the auto maker currently is.

Yet, with at least a slower-growing US economy ahead for the next six months to a year, and the scarcity of more capital, Cerberus might be on the hook for more losses than it expected. Plus, the idea of buying an auto maker which hasn't been a profitable leader for years, just because it was cheap, didn't seem all that compelling to me.

As the Journal article suggests, if Cerberus' other deals are looking worse than planned, perhaps Chrysler is, too. And then the firm backed out of its recent United Rentals buyout agreement. Could it be that current costs of capital are making some of the firm's most recent acquisitions hard to turnaround, as they are caught between a slowing economy, higher funding costs and less of a likelihood of spinning the units back out at higher prices than was once expected?