Another Successful Read of the Market by U.S. Auto Makers

puppy.jpg With all the controversy surrounding Michael Vick’s dogfighting proclivities Chrysler Group’s Dodge division decided now was a perfect time to release a viral video of a Dodge Nitro electrocuting a puppy to death. Note to Dodge, using force lightning against Mark Hamill, good, using it against a puppy, bad. The ad was created by the BBDO Netherlands division of Omnicrom, and carries the tagline, “charged with adrenaline,” followed by that EXTREME Dodge guitar riff.
Chrysler is backpedaling faster than a pit-bull in Blacksburg and has pulled the ad from YouTube (although you can watch it in the Jallopnik link below), apologizing for the “fictional yet inappropriate treatment of an animal.” Chrysler is also pulling the “come on, those crazy Europeans are morally bankrupt anyway,” excuse, while “investigating the origins of the commercial.”
Dodge Nitro Kills Dog, Makes Us Cry A Little [Jallopnik]
Chrysler pulls SUV ad with electrocuted dog [Reuters via CNN]

  • 21 May 2007 at 4:39 PM
  • Chrysler

Chrysler, Daimler, Cerberus: Who Got Screwed?

cerberusinfernohelldealchrysleriacocca.jpgHell is not a place that is usually invoked in discussing corporate mergers and acquisitions. But it has come up frequently in discussions of the unwinding merger of Daimler-Benz and Chrysler. When news of the sale of the Chrysler unit to a private equity fund broke, The Wall Street Journal’s DealBook compared the 1999 merger to the “Deals from Hell” discussed in a book of that title from Robert Bruner, dean of the Darden School of Business at the University of Virginia. The phrase also made it into the title of a Newsweek article by business columnist Allan Sloan.
“This is definitely in the hunt for being one of the all-time deals from hell,” said Bruner tells Sloan.
One of the inspirations for all this is the name of the private equity firm acquiring Chrysler—Cerebus. The firm takes its name from the three-headed dog said to guard the gates of Hades in Greek and Roman mythology. Another, however, seems to be the hellish negative return the Germans appear to have received for their purchase of Chrysler. The company then known as Daimler-Benz paid $36 billion to acquire the company, and took on enormous unfunded health care and pension costs—usually called “legacy costs”—as part of the deal. Last week Daimler cut a deal in which it will wind up paying the new owners to take it off their hands.

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  • 17 May 2007 at 3:20 PM
  • Chrysler

Is Going Private A Passing Fad?

chryslerprivateequitygoingprivatecerberus.jpg“The only sure thing that can be said about the past is that anyone who can remember Santayana’s maxim is condemned to repeat it,” Walter Isaacson wrote in Sunday’s New York Times Book Review. “As a result, the danger of not understanding the lessons of history is matched by the danger of using simplistic historical analogies.”
This came to mind this morning while when we came to the end of David Wessel’s Capital Exchange column in the Journal. Wessel uses the Cerberus purchase of Chrysler as a jumping off point for a column describing the causes of the recent rise in the number of companies going private. Twelve companies on the S&P 500 are set to go private, with a price tag of $179 billion.
Wessel’s column runs through the now-familiar causes: over-regulation, readily available leverage, freedom from pressure of unions and other so-called “stakeholders,” and the desire of many of the most capable corporate executives to get out of public markets (which they view the highly-risky—executive turnover is high, new regs threaten personal financial liability and possible jail time—and under-compensated).
But it was his conclusion that got stuck in our craw. “Whatever the cause — and all these factors play a role — this isn’t a permanent shift. The leveraged-buyout boom of the 1980s ended when credit got tighter, takeover targets got expensive and squeezing fatter profits from acquired companies got tougher. And that will happen again. The only question is when,” Wessel writes.
We’re not sure Wessel should so confidently discount the possibility that something more fundamental might be happening to corporate structure in America. While the current boom in private equity will certainly not last forever, there is at least some evidence that we may be witnessing the nascent stages of a shift in the way our companies are owned. law professor (and Ideoblogger) Larry Ribstein has written extensively about the rise of alternatives to the publicly held corporation.
Larry Ribstein responded to the news of the Chrysler deal by reminding us that this may be a good illustration of what he has called “a fundamental shift of American business away from publicly held corporations.
“Maybe the public corporation will be replaced by the public uncorporation, giant umbrella LLCs like Fortress that manage large hedge funds that run slim little operating companies, like the future versions of GM and Ford,” Ribstein says.
At the very least, Ribstein’s scholarship in this area has demonstrated that there is no reason to simply assume that this shift in ownership and organization is a temporary phenomenon. A phrase that we know is familiar to Wessel might be more useful than Santayana’s here: past performance may not be indicative of future results. Just because the last few years of this decade may have resembled the buyout boom of the 1980s doesn’t mean we are condemned to repeat what followed.

Closing the Door: Going Private Offers Rewards
[Wall Street Journal]

  • 14 May 2007 at 10:34 AM
  • Chrysler

Daimler’s $650 Million Bar Tab

DaimlerChrysler_Verwaltungsbau_Moehringen.jpgThere’s a lot of talk today about the sale of Chrysler to Cerberus (and Lindsay Campbell’s appearance on the Sopranos, and how Warren Buffett hates animals). Larry Ribstein sees the transaction as a paradigm of the private equity deal (the hound of Hades is putting up $7.4 b “in return for which it is demanding cooperation,” so that it can “clean up contracting problems that are threatening to send an otherwise viable business down the tubes). Rupert Murdoch’s Wall Street Journal notes that Cerberus could effectively cut costs by consolidating Chrysler Financial and GMAC (of which it has a 51% stake). The Journal also adds that Stephen Feinberg, the head of the three-headed dog, is not only a Princeton grad, not only a champion tennis player, not only a paratrooper, but an avid deer hunter (which is important, because men who like to kill animals tend to know what they’re doing, and deer are vastly overpopulated in New Jersey). Finally, the J answers the question that’s been weighing on everyone’s mind, “Did Cerberus have a website last year?” A. No.
The Times quotes Hans-Richard Schmitz, representative of the German Association for the Protection of Shareholders, who weighed in with some not at all breaking news and the go-to metaphor for the deal: “This marriage made in heaven turned out to be a complete failure.” The Gray Lady also has some charts.
Rupert’s other publication, the Post goes where no one else dares go, and reminds everyone that “Sun-drenched billionaire Kirk Kerkorian was shut out of the process despite a late $4.5 billion bid for Chrysler.” (Our emphasis).
But it’s Deal Journal that actually tells us something interesting: by “sale of $7.4 billion,” Daimler actually means “it’s going to cost us $650 million” to get rid its red-headed step-child.

As the release itself explains:
Cerberus is contributing $5 billion into the new company (this does not go to Daimler). And another $1.05 billion goes into the financial business (this, again, does not go to Daimler.) Daimler gets $1.35 billion (but will loan the new company $400 million.)
So Daimler makes about $1 billion then, right? Actually, no.
Like a politician obliquely saying “mistakes were made,” Daimler goes on to say that the restructuring “will give rise to a cash outflow” of $1.6 billion.
In sum, the net outflow will be about $650 million, plus another $878 million of “prepayment compensation”, Daimler says. And that’s how a $7.4 billion windfall actually turns into a bill.

We also like this little exercise in decoding deal-speak because it affirms what Carney said a few months ago about how the only way anyone would take on Chrysler is if they were being paid to do so: “When we called one of our banker friends to ask for a valuation on what GM might pay for Chrysler, he joked that GM might ask Daimler to pay them to take it off their hands.”
A $7.4 Billion Windfall for Daimler. Not! [Deal Journal]
Chrysler going to the dog [Ideoblog]
Buyout Firm Close to Winning Chrysler Bidding [WSJ]
Chrysler Group to Be Sold for $7.4 Billion [NYT]

  • 12 Apr 2007 at 2:59 PM
  • Chrysler

WestLB Regards Orders of Magnitude As ‘No Big Deal’

Everyone’s allowed one “I was drunk” pass and WestLB just used theirs: the company has acquired a 14% stake in DaimlerChrysler—by accident. FT Alphaville reports that it’s not exactly clear how this “slip-up” occurred, but apparently the traders who were recently fired from WLB for taking large positions in Volkswagen were involved with the Daimler transaction. (We’re not really ones for telling people how to live their lives; if you want to drink and drive, more power to ya! But maybe abstaining from drinking and trading would be a wise idea.)
DaimlerChrysler is in the midst of trying to free itself of the dead weight that is the American-portion of its company. Perhaps WestLB would be more interested in that deal, unless of course they’ve already bid on it by accident.
WestLB ‘inadvertently’ amasses 14% in DaimlerChrysler [FT Alphaville via Dealbook]

Kirk Kerkorian Bids For Chrysler!

kirkkerorianbidsforchrysler.JPGThis is getting exciting! Kirk Kerkorian’s investment company, Tracinda, made a $4.5 billion cash bid for the Chrysler Group today, according to reports. This comes fast on the heals of three other headline making Chrysler stories:
• that Daimler-Chrysler’s big German boss, CEO Dieter Zetsche, confirmed the Chrylser group was for sale,
• that bids had been submitted by Blackstone, Cerebrus and Canadaian automanufacturer Magna International,
• and that JP Morgan was putting the deal on a fast track, reviewing the bids beginning this week and hoped to have selected a winner by month’s end.
Well, you can wipe those off the whiteboards, kids, because the headline is going to Kerkorian’s bid. Not only is it a cash deal, he’s also got the backing of both the United Auto Workers and Chrysler senior management.
Prior to this announcement it was widely rumored that Magna might have the strongest bid, since it was thought to be the most likely bidder to keep the Chrysler relatively intact and gain the cooperation of unions. But Kerkorian’s offer now seems the front-runner. In fact, it seems so strong that it might entirely change the game.
“You can bet the boys down at Blackstone and Cerebus are cancelling their Easter weekend plans,” a source who consults for many private equity groups told DealBreaker. “Time to rewrite the bids.”
Kerkorian has a long, storied history with Chrysler. In the mid-nineties he attempted to takeover the company in an alliance with Lee Iacocca. He remained one of the largest single shareholders in the car company until it merger with Daimler-Benz in 1998. At the time—and to this day—many saw Kerkorian’s handiwork behind the deal.
In the nineties Kerkorian was often represented as a “corporate raider” and many feared he wanted to own Chrysler only to destroy it, or at least disassemble the company and slice of its less profitable divisions and product lines. These days many fear that the private equity bidders have similar plans, and Kerkorian seems to be promising to keep the company intact.
“Can KirkKerk actually be the white knight he always claims he is and save Chrysler from the ‘merger of equals’ he initially drove them to? Stay tuned for the next episode of Crazy Chrysler!” Jalopnik editor Ray Wert told DealBreaker. (Note: Ray uses phrases like “he initially drove them to” but this isn’t his fault. It is a well-known condition that car pundits cannot resist automotive puns.)
“It’s like the late 90’s all over again, only in reverse,” Ray added. (Note: Reverse. See what we mean?)
Kerkorian Offers $4.5 Billion for Chrysler [New York Times]
Tracinda’s Letters to Chrysler [pdf via New York Times]
The Official Car Pundit Drinking Game: Is The UAW In Bed With Kirk Kerkorian? [Jalopnik]
Chrysler sale looks certain [Detroit News]
Update: The lads at Deal Journal are outdoing themselves translating the letters from Tracinda speak into a normal human language.
A sample:

The returns will not come quickly. Investors that feel the need to show “mark to market” results in their funds in relatively short time frames (just a few years) will not be willing to invest as necessary over an unusually lengthy period of time to achieve the necessary end results.
Dr. Z., why are you imperiling the future of Chrysler by playing footsie with the fast-money crowd from New York? I don’t have to live by the same rules and can be a better steward than the folks, like Cerberus, who’ve chosen the hound of Hell as their name and mascot.

Translating Kerkorian’s Chrysler Letter [Deal Journal]
Translating Kerkorian’s Letter II: The Terms [Deal Journal]

Will Blackstone Break Chrysler Into A Million Little Pieces?

Chrysler Detroit.jpgLate last night we met up with a refugee from private equity who claimed to have knowledge of what Blackstone’s plan for DaimlerChrysler’s Chrysler business looks like. He hadn’t seen the bid that Blackstone was rumored to have been on the verge of submitting last week but claimed to have been privy to some internal discussions at Blackstone about the fate of the perpetually troubled automaker. He described Blackstone’s plans as “not so much a break-up, but more like a brick through a window.”
This was, of course, after a few drinks and we half-suspect that his boasts of inside knowledge of Blackstone’s plans were just that—boasts that had more to do with the quantity of gin that had poured over the lips of the four or five almost empty glasses sitting on the table in front of him than the quality of his knowledge inside of Blackstone. Those gin soaked lime rinds in the bottoms of the glasses did not exactly cry out “reliable source.”
But it turns out that academic observers who spoke to Fortune about Blackstone’s likely plans agree with our friend. Kind of. Even if not they did not go as far as describing the plans as breaking Chrysler into the “million little pieces” we heard about in the East Village bar last night, the academics seem certain that Blackstone plans to carve up chunks of Chrysler and sell them off. Call it giving Chrysler the EOP treatment.
“For Blackstone, it’s all about the game. You buy an asset, and there’s a huge amount of value to be unlocked by repackaging the assets and finding buyers,” Rensselaer Polytechnic Institute management professor Phillip Phan tells Fortune. “There are really two ways to make money. One is by cutting costs, rewriting pensions contracts, closing capacity and outsourcing to Asia and Eastern Europe, where the auto sales growth is anyway. Or you just sell off the assets and trim product lines.”

What would Blackstone do with Chrysler?

Chrysler: Blackstone To Strike First?

Chrysler Detroit.jpgBlackstone may submit a bid for the Chrysler group as early as today, the Detroit News reported this morning. As of late last night no bids had been received, the paper said. Earlier reports had indicated that the bids were due on Thursday. Blackstone is said to be working with Centerbridge Partners on a joint bid.
So what happened to that Thursday deadline? In our experience, the people who actually work at private equity shops are loathe to submit bids on Thursdays, so this isn’t that surprising. The problem with the Thursday bid is that it gives the sellers all day Friday to consider the bid, and raises the possibility that a second round of bidding might start as early as Saturday or Sunday. A good Friday afternoon bid probably frees up the weekend, since a response probably won’t come in until Monday.

Chrysler suitors rush to make bids
[Detroit News]