Bailout Watch 202: Requiem For A Strip And Flip
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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@ 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.