“We were too optimistic on timing. Maybe what we should have done was not bought it.”
Cerberus Capital honcho Steve Feinberg in a New York Times takedown on his private equity bid to turn Chrysler around. Ya think? So where did The Old New Chrysler go wrong? Was it simply “one of the investments made at the very top of the credit bubble,” as a Harvard Business School professor puts it? Or was it that “Cerberus did not have a clue about the automotive industry,” as a former Chrysler employee claims? Or was Cerberus’s investment of $7.4 billion not enough in the first place? Probably all of the above, but whatever the correct diagnosis is, it’s lost on Feinberg. “I don’t know what we could have done differently,” he says. “From the day we bought it, we worked hard to improve it.”
He’s in a very competitive field. There’s no way in heck he’s really gonna tell what they planned, or where they made mistakes.
All they were ever going to do (as has been said many times on this site) was to strip and flip it. There never was another plan.
Maybe they should’ve seen that Daimler had already stripped ChryCo and that they were the flippee. I can’t imagine their investors being very happy with that investment.
The president of Cerberus is the clueless John W. Snow, Bush’s former Treasury Secretary. He is an economist and a railroad man. Why Cerberus would think such a guy knows any thing about running a car company, except into the ground, is beyond me.
It is clear to me the plan was pump and dump. Only problem was they did it just as the economy collapsed. They got what they deserved. Too bad an American icon is now an Italian run government owned mess. But they are the only ones who would touch it.
“From the day we bought it, we worked hard to improve it.”
Wall Street golden boy doesn’t understand what happens when you try to polish a turd.
Cerberus’ investors really should question the wisdom of having these guys manage their money after they bought GMAC AND Chrysler in the same year.
Ya gotta love it when the tallest hog in the trough comes clean. He seems like a decent man.
But, realistically, would Chrysler have done any better if it remained under Daimler’s control? Let’s face it, Daimler’s not doing remarkably well now either, and Chrysler’s crash was something you could have seen long ago – bad quality, bad build, bad interiors, ‘wear item’ 60,000 mile automatics, and dealers that wished their customers would go away. It was a matter of time before the price of gas caught up with their SUV heavy lineup, and then it was all over.
Maybe Cerberus was just the ones stuck holding the bag when the whole shebang came apart?
It might have been a different story if at the time of the sale, Chrysler had some competitive vehicles. With all the dogs (pun intended) in Chrysler’s product portfolio along with the years and billions of dollars it would take to create a compelling product line, they didn’t stand a chance.
During the due diligence phase, they probably had reams of MBAs and other assorted bean counters going over the books. If only they had taken the time to actually drive some of Chrysler’s products and then drive some competitive products, they would have realized they were making a big mistake. As it stands, the key decision makers were likely driven around in chauffeured limousines and hadn’t personally driven a D3 product since they were in college.
Feinberg’s comments lead me to believe that some people were right that the Cerberus move was not a cold-eyed strip and flip but a starry-eyed management ego trip. Cerberus has been too efficiently rapacious over a long period of time to have made the mistakes and miscalculations that were made with Chrysler/GMAC. Only top management hubris can explain a debacle like that.
Photo caption says “only photo known to exist” … not exactly true … about two years ago, there was a photo of Steeveo in the WSJ as he was hauled into court to testify …
http://blogs.wsj.com/deals/2007/12/18/cerberus-feinberg-the-money-shot/
In the WSJ photo he looks markedly older than the one on this site (although the one here is from 12/2008) before Ceberus was jolted by GMAC and Chrysler going south)…
p.s. The bloggers on that page are not nearly as consistent in their humourous snarkyhood as my fellow TTAC’ers are here!
It looks like we have a wiseguy over here.
We can’t know Cerberus’ real intentions in buying Chrysler, and maybe their plans for it changed after they bought it. Someday we may know for sure but for now there are three main theories:
1.) Strip ‘n’ Flip. This is the weakest in my opinion. What happened after Chrysler was acquired did not follow the pattern of a strip ‘n’ flip. To whit no plant closures, no layoffs, no selling off of facilities/product lines or the closing down of same to achieve cost savings, “synergies”, “strategic alignments”, and all that other happy horsesh*t terminology that execs are so fond of spouting these days. Instead they hired some big guns, Jim Press, and Nardelli (I know, I know, most likely ill-suited, but a big gun none the less who I’m sure cost plenty). And then there was the girl from Lexus and I think a guy from same for the overseas marketing. Notice they went for a lot of talent from Toyota; although they didn’t know much about the car biz they understood who was number 1 in mind share if not market share. And how do you explain Daimler holding on to almost 20%?
Also notice that they made some immediate changes: interiors improved, sales bank gone (a vestige of Daimler, not Chrysler), models dropped, and dealers consolidated. The canning of Trevor Creed (I don’t think he retired voluntarily) should also be noted. These are things Daimler should have done but didn’t. Cerberus also didn’t deep six the deal with Gertrag for DCT’s, but the deal fell thru when Gertrag wanted too much $ up front because of the uncertain economic climate.
The biggest reason some hold to the strip ‘n’ flip theory is because Cerberus would not put in anymore money into the venture. I think this was because they really believed they could do it with smart business moves and because once they posted their money for Chrysler their bylaws prevented them from shifting any money from another of their more successful investments. I believed they also thought they could use OPM (read: bonds). Well, we know how that turned out. The car business requires 3 things: passion, sacrifice, and MONEY. When those things come together good things happen. If anyone of them are missing products are mediocre at best.
2.) All Cerberus wanted was GMAC and Chrysler Financial. This theory is much stronger IMO. After all the people who run the tri-dog are mostly finance types who understand the biz intimately. It still doesn’t account for the hirings and the expenditures of what little money they had for improvements.
3.) Become a design/distribution/manufacturing company for other auto companies as well as a for themselves. This IMO is the theory that holds the most merit. I believe I first heard it from Psarhjinian or Pch101 comments on this site. This would explain the hiring of Press et. al. It would also explain the attempted deals with Nissan and Chery, and the consummated one with VW. It would also explain Daimler’s almost 20% stake in Chrysler – the upcoming Grand Cherokee was to share bits with the new M Class. We don’t what else might have been planned between the two. One could see future collaborations with VW as well; for Chrysler a diesel, exterior/interior design; for VW help with their upcoming pickup and maybe more reliable electronics :-).
Time will reveal which of these three was correct or if it was something entirely different.
Oh please.
Cerberus was guilty of the EXACT same thing many of the know-it-alls on here are. They thought those in control were just morons and that they were smart enough to fix a busted down company. The cerberus failure is a valuable reminder that you know what, MAYBE running a big-ass car company isn’t that simple after all.
Just a thought though.
Couldn’t happen to a nicer bunch….
Thank you windswords. I really appreciated your overview. You helped me understand the past few years of Chrysler.
Daimler proved they were clueless about running a high volume domestic manufacturer leaving Chryco in absolute shambles. Remember, Cerberus didn’t actually buy Chryco from Daimler, they assumed the existing debt. Cerberus saw what they thought was opportunity to profit in whatever form and got exactly what they deserved, nothing. I tend to agree that maybe some Cerberus ego was involved to think with zero automobile manufacturing experience they would somehow profit from the shambles Daimler left. Cerberus got involved only for the profit motive forgetting completely that yes maybe it does take automobile experience to be in the automobile business. Doesn’t matter who they hired and Nardelli in my mind was a complete joke. Anyone care to venture a guess as to how soon Cerberus will invest in automobile manufacturing again?
I’ve been beating this drum for awhile now, but I’ve never bought into this being a strip-and-flip, and viewed it a specialization/ outsourcing strategy. Chrysler Co. was going to focus on building minivans and trucks for itself and others, and have most of the cars built by other parties, and it had probably planned on expanding internationally to tap into emerging markets.
In this instance, Feinberg is actually right — they grossly underestimated the time that would have been needed to make this work. It could have easily taken a decade, and my guess is that they probably forecast that it would hit breakeven in about 2-3 years and become strongly profitable in five years. Those milestones would have been ridiculously optimistic even without the Great Recession.
What is likely part of the problem is that private equity tends to work on these 3-5 year horizons. Had they forecasted that it could have taken a decade, they wouldn’t have been able to do the deal, even with a good economy, because the timeframes would have been too long and the returns too low.
It would be interesting to know whether they knew that the timeframes were aggressive but decided to take a chance anyway, or whether they honestly didn’t know. Either way, though, they wouldn’t look good as a result — neither incompetence nor dishonesty are good defenses.
Don’t assume that Cerberus lost its investors’ money to buy Chrysler. They borrowed it, and left Citi and JP Morgan holding the bag (old Chrysler). And they still own half of GMAC, which is now a federally chartered bank, propped up with taxpayer money. GMAC is now a vehicle for hidden subsidies to Government Motors and isn’t going to be allowed to go under. Call me crazy, but I think Cerberus is still going to make money when all the dust clears.
We were too optimistic on timing
Optimistic indeed.
Wall Street types have extremely short time lines. We are talking about guys who have difficulty seeing past this quarter into next quarter.
In the automotive business progress is measured in decades, not quarters.
Product cycles, from concept and design to end of life, can take 5-10 years. Repair parts for those vehicles may be available for 5-10 years after that.
Wall Street doesn’t have the attention span to run an auto maker. Anyone who thinks so is a fool.
-ted
I’ve never bought into this being a strip-and-flip, and viewed it a specialization/ outsourcing strategy. Chrysler Co. was going to focus on building minivans and trucks for itself and others, and have most of the cars built by other parties, and it had probably planned on expanding internationally to tap into emerging markets.
I’m not certain about that that excuse works either as I understand the profit margins on trucks were very large then it may have made sense for a outfit to build its own the Sienna & Odyssey killed any notion of Chrysler superiority in vans
Any attempt at selling Chrysler outside the US especially with the Neon/PT Cruiser/Caliber was received with scorn. They were interested in the 300 but wondered why its interior was so low rent.
These were Californian house flippers looking to redo an aging French Chateau – out of their depth – in time, money and skill – plenty of ego though.
@Lorenzo:
Bingo.
GMAC is the funnel that refills the coffers. It was always in the plan to combine CFC and GMAC.
GMAC will be a money printing operation once they flush the remaining bits of RE portfolio. The auto lending operation is already cashflow positive.
I understand the profit margins on trucks were very large then it may have made sense for a outfit to build its own
Nissan has struggled with full-size trucks, and were a good candidate to buy them from Dodge.
the Sienna & Odyssey killed any notion of Chrysler superiority in vans
Good enough for VW, apparently: https://www.thetruthaboutcars.com/2009-volkswagen-routan-review/
Any attempt at selling Chrysler outside the US especially with the Neon/PT Cruiser/Caliber was received with scorn. They were interested in the 300 but wondered why its interior was so low rent.
I presume that the plan to sell in emerging markets would have involved selling outsourced cars, such as whatever they would have acquired from Chery, Tata, etc., along with some Jeeps.
If you learn the private equity approach and mindset, you can see why they would have tried it this way. PE funds that aren’t looking to immediately liquidate will typically hire new management (the presumption is that the existing management failed) and shift the focus of the company to doing what the company does best, while outsourcing the rest. Not a bad approach in theory, but the car business has much longer cycles than most businesses, and I doubt that they properly accounted for that critical difference.