Did Cerberus Bite Off More Than It Can Chew?

did cerberus bite off more than it can chew

Cerberus Capital Management had to know it was taking on risk when it picked up Chrysler and GMAC at cut-rate prices. After all, Chrysler had tried its level best to drag Daimler down during their brief, unhappy marriage and GMAC is hardly a low-risk proposition given the current credit market dyspepsia. But private equity firms are big and loaded, right? Cerberus will weather the storm, right? Andrew Sorkin of the NY Times' Dealbook blog reckons it might not, and predicts dire consequences for all of private equity-dom. Noting Cerberus' founder Stephen Feinberg's disdain for publicity in the wake of its purchase of the terrible twins, Sorkin figures the fund is in for some more bad press in coming days. He calls the purchases "perhaps the riskiest bets at the peak of the buyout boom," and points to Chrysler's $18b in pension and health care liabilities as a potential cause for a Cerberus meltdown. If such a meltdown were to occur, it would certainly have Sorkin running for his superlatives thesaurus.

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  • Christopher Christopher on Feb 21, 2008

    Good God. You folks are awfully impatient. Cerberus has barely gotten started to the "strip" phase and you're already calling for the flip? If there's one word you can't use to describe the big three Detroit automotive companies it's nimble. So, hold your horses. Once they're done stripping then they can start improving the product to get it to the point where someone else will want to buy it at a price point profit.

  • NBK-Boston NBK-Boston on Feb 21, 2008
    bluecon: The Constitution does not give the government the right to tax one party and give the money to another party. That statement is just plain wrong. The Constitution clearly gives the federal government the power to tax (also in Art. 1 Sec. 8), and contains no restrictions like the one you suggest on the use of any money it so collects. At this stage, the only thing I can do is suggest reading up a little on the history, origins and purpose of the federal Constitution. I recently got through Woody Holton's Unruly Americans and the Origins of the Constitution (Farrar, Straus and Giroux; 2007) and think it is fairly cogent and a pretty good place to start -- along with a quick perusal of the original document itself.

  • Shiney Shiney on Feb 21, 2008

    I for one never thought that Cerberus had the slightest idea what they were doing when they bought Chrysler. The ego of the Private Equity people at the top of their boom was matched only by some of those in the dot.com boom who truly believed that a new economy had formed, one that required only revenue and investors, not product and profit. The very idea that Cerberus would have to improve a complex product with a long lead time (the cars themselves) in order to make the company attractive enough to sell eliminates Chrysler from being a true "strip and flip". That none of them had any background in the industry, only "advisors", made the stench of self delusion even stronger. These were people who made vast amounts of money through their connections and positions at a time when everyone in private equity was making vast amounts of money. But instead of seeing how lucky they were to be competent people in the right industry at the right time, they came to believe that they were so smart and effective that they clearly deserved the millions they were paid, that they deserved artificially low tax rates, and that they could swiftly teach all the old dogs in a highly competitive industry like automobile manufacturing and marketing new tricks. In their minds, the very presence of a "private equity" investment in their management would improve the products, drive down costs, fill the dealers with customers, and then fill the boardroom with deep pocketed potential buyers for the whole company. All thanks to their unparalleled and godlike ability to shuffle paper. Pure hubris. BTW: NBK-Boston - thanks for your analysis of constitutional issues...

  • Shiney Shiney on Feb 21, 2008

    I want to quickly add that I do believe parts of Chrysler, particularly Jeep, do have value. I just think the complexity of the company's potential liabilities (existing dealer contracts, customer warranties, existing product line, etc.) inherited by Cerberus the day they took over for "free" greatly exceed any likely upside.

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