One point on which the mainstream motor press has always agreed with TTAC is skepticism towards Cerberus’ claim that it doesn’t intend on “stripping and flipping” Chrysler. It’s been conventional wisdom since the Cerberus purchase was announced, and it makes perfect sense. They got ChryCo for a song, so why not break it up and sell? It’s what private equity does, and like a new Sebring, Chrysler is definitely not worth more than the sum of its parts. Well, we were wrong. Maybe. Bloomberg reports today that Cerberus has agreed to give up any profit on a future sale of Chrysler LLC should the company receive federal financial aid. Of course, this is classic bailout fodder, the proverbial spoonful of sugar to make the federal equity position go down smoothly with taxpayers. Chrysler is at a huge disadvantage in bailout wranglings, thanks to its ownership by a secretive private equity fund, and several pro-bailout commentators have already suggested throwing Chrysler to the wolves. Want some hard-hitting analysis on this revelation? “This is a sign they need the money and are willing to do anything to get it,” says Dennis Virag, president of Automotive Consulting Group in Ann Arbor, Michigan. Ya think? Cerberus forswearing profit on a future sale is a metaphor-defying repudiation of everything everyone has assumed about the New Chrysler project. It can only mean that Cerberus would lose even more money breaking Chrysler up and selling its parts than by limping along on a ‘bring and a prayer. Oh yeah, and a federal equity position.
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It’s amazing how quickly expectations of future profits can evaporate in a short time. Ask anyone who’s bought a house in the last couple of years.
Cerberus has Chrsler in an LLC to protect the greater fund from any losses.
I could only see the Feds giving them a loan if Cerberus gives them a guarantee on the repayment from their other funds. Or if Cerberus puts up $ for $ the amount the feds loan them.
The idea of bailing our a very wealthy private equity fund is insane.
I smell a ChryCo Suicide Watch.
Chryco is effectively valueless now (see Daimler’s take on their remaining portion), so offering to “give up” any (read non-existant) future profit is a classic case of trading what you don’t have. At present, Cerberus is trying to avoid having to take a bath on the liquidation, a little extra government-supplied money will no doubt help them with their pump and dump.
It’s a different financial world than when Daimler booted Chrysler to Cerberus. Chrysler is part of Cerberus’s Series IV hedge fund, which explains the secrecy.
It would be interesting to see a full disclosure of what else populates the Series IV hedge fund in the interest of a full disclosure before a single penny of taxpayers money gets promised.
Since Chrysler is a LLC, bankruptcy is the other option.
A commenter previously suggested a last-moment phoenix-style rebirth of Chrysler, having saving themselves with a genuine product (referenced the PT Cruiser and 300 I believe). Think we’ll see this again if this bailout happens? I don’t see why not. They sure can’t continue on what they have right now outside of the Town & Country.
It’s very generous of Cerebrus to promise not to take what they’ll never get in exchange for getting help to break even on the whole deal.
Whatever you do, don’t throw me in that briar patch!
The problem is, it takes more than one hit product to save even a company Chrysler’s size. And it usually takes more than just a stylish exterior to have a hit these days.
The strip and flip scenario never made much sense to me. Sure, you could sell off bits and pieces that were worth something (the Jeep brand, maybe the Bramalea plant), but then you’d be left with a corporate shell consisting of nothing but huge liabilities adding up to more than you got from the asset sales. Call me naive, but my hunch was always that there were some huge egos at Cerberus who really thought they could turn around the mess that Daimler made of Chrysler.
You’d think that if they were going to part out the company they would have started the process by now, but instead they have made a few strong product development moves that suggest some degree of commitment to remaining a going concern (e.g., the new Ram).
What Cerberus didn’t anticipate, obviously, was the implosion of the entire auto industry that suddenly turned a difficult situation into an impossible one. It’s hard to imagine any scenario at this point in which more than a few bits and pieces of Chrysler survive, but I think it’s entirely plausible that Cerberus originally bought the company with the intention of keeping it going.
I’d like to see how the Town and Country performs with a GM powertrain or with a Nissan powertrain. With a GM 3.6 liter engine and 6-speed automatic, compared to the Chrysler 4.0 liter, the Chrysler minivan should be a half second quicker and get 1-2 better mpg.
@ jimble:
The Ram was well under way before Cerberus took over Chrysler, and they had already started the strip and flip process, marketing their minivan and truck lines to other automakers and cutting costs and, by many accounts, all development spending.
Cerberus’ offer to trade future profits is quite generous. They get a nice $7B check to put into their bank accounts before pulling the plug on Chyrsler.
I don’t believe Cerberus was ever interested to make money on Chrysler in a short run or to sell it by parts. Cerberus boss has given interviews to WSJ & NYtimes right after purchase of Chrysler and unless either journalists are very gullible and could not see through the man, both articles concluded that his motives were to save the American Icon, not to profit from it.
That is maybe a conflict of interest for him, since he did not rely completely on his own money, but was using other peoples money to resurrect the brand. At the end some rich guy(s) will loose a lot of money, who new what he(they) were doing.
When you look at Ford/GM the picture is completely different – those are public companies. The speed of deterioration indicates that either management was completely incompetent or completely dishonest. I wish this case was argued in the court: “Your honor, my client Rick Wagoner, has been CEO for 8 years and is a complete schmuck. He never lied, he just an idiot for the job”
@guyincognito:
How does marketing your product lines to other companies while continuing to market them yourself constitute strip and flip? If you were stripping the company of its assets you would sell off entire product lines. Notice that Chrysler didn’t sell the Stow-N-Go feature to VW, they kept that for themselves. That indicates to me that they’re still serious about competing in the minivan segment.
As for the new Ram, development was certainly well under way when Daimler unloaded the company, but it looks like Cerberus did a very conscientious job of bringing it to market, sweating the details in a way that Chrysler, like Detroit in general, has sometimes neglected to do recently.
autonut, you got taken in.
@ jimble :
“If you were stripping the company of its assets you would sell off entire product lines.”
You certainly would, if someone wanted that at the price you needed to make a profit.
autonut: private equity companies don’t do charity. Cerberus didn’t buy Chrysler out of a sense of patriotism. They bought Chrysler because they (mistakenly) thought they could make money. Private equity doesn’t make money by holding onto a property for long. They buy it and then do one of several things: 1) fix it up and sell it or 2) strip it and flip it, or 3) sell off the parts.
You are incorrect when you say that the Cerberus boss was either completely dishonest or completely incompetent. He was, in fact, completely dishonest and completely incompetent.
Indeed. Pump and dump (Jared’s #1) or strip and flip (#2) was always the plan, and only the complete collapse of external finance (and the associated lack of buyers) prevented this from happening already.
If the bailout guys buy that line then I have some land to sell them in Florida. Just look at how the big movie studios run their program. They never make a dime… haven’t in decades, if you believe their books. They are notorious for promising percentages of profits in exchange for concessions, and then the profits somehow never materialize. Expenses somehow always exceed revenue.