• 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]

Chrysler Sale: Full Employment Act for Bankers

Chrysler-PT-Cruiser.jpgFees tend to make everyone happy, especially the leaches at the receiving end of them. It’s even more fun when you can collect them by helping one company who made 36 billion mistakes nine years ago pay another company to take the unwanted child that never should’ve been carried to term off its hands. Deal Journal reports that there are 600 people involved in the DaimlerChrsyler proceedings.

The Cerberus team was led by the firm’s founder, Stephen Feinberg, and Lenard Tessler, who runs its leveraged buyout arm, another person said. At Daimler, the point people on the deal besides, of course, Dr. Z — the automaker’s chief, Dieter Zetsche — were Chrysler head Tom Lasorda, and Paul Knauss, who oversees auto lender Chrysler Financial.
The bankers that have surfaced so far as having some role on the deal include J.P. Morgan, which advised Daimler, as well as Citigroup, Goldman Sachs Group, Morgan Stanley and Bear Stearns, which helped finance it. The law firms working on the deal include Shearman & Sterling, Skadden, Arps, Slate, Meagher & Flom and Schulte Roth & Zabel, which has risen to riches counseling Cerberus, according to this post from our colleagues over at the Wall Street Journal’s Law Blog yesterday. (Considering how competitive the M&A world is, it wouldn’t surprise us if more advisers surface.)

The Chrysler Deal Making Army [Deal 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]

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]

Is The Chrysler Sale A Head Fake?

daimlerchryslerperhapsforsale.jpgWe’re heard all sorts of convoluted conspiracy theories about what DaimlerChrysler might really be up to with this whole “Chrysler either is or is not for sale” flag running up and down the pole. But by far our favorite comes today from the car-guys over at Jalopnik. According to the Jalopnikistas, Daimler-Chrysler CEO might not want to sell Chrysler at all. It’s just a stunt to pacify his board of directors.
Or something. Here’s how Jalopnik explains the scheme:

With so few parties seemingly interested in buying the ‘merican side of the German-American hybrid outright, why would DaimlerChrysler CEO Dieter Zetsche be so interested in not selling it off chunk by badge-engineered chunk?
…it’s because Dr. Z isn’t actually all that interested in seeing the group he once helmed sold off at a yard sale? Pardon us for speculatin’ sentimentally here, but we’ve heard the king teutonic knight has a bit of a soft spot for his old stomping grounds in Auburn Hills. We know the kids and the little lady certainly seem to like it state-side, and it’d be a shame to have to pack up the house and move everyone back to Stuttgart permanently. But in all seriousness (or however serious we get), maybe Dr. Z’s using this as a play to keep the board at bay, while he gives Tom “Slim-Faster, dammit!” LaSorda time to make cuts and level the boat again.

Not So Many Briefcases Left: Does Dr. Z Really Want To Make A Deal On Chrysler?

GM and Chrysler: Deal or No Deal?

ChevyTahoeindex.JPGWe just learned that you literally can’t order a cup of coffee on Wall Street without hearing talk about a possible combination of General Motors and Chrysler. It’s a treacherous block-and-a-half of icy sidewalks (remember, some of us DealBreakers are still on crutches) to the Starbucks on Wall Street, and we passed two different groups of people openly discussing the rumors. And forget about the line inside Starbucks. Was anyone talking about anything else? (The weather doesn’t count. But, to be frank, they were also talking about airlines.)
So let’s face it. This is all a bit premature. The Germans have just begun considering what they might do with Chrysler. There’s no doubt the Daimler-Chrysler merger has not worked out as hoped. And surely Daimler wants to do something big with Chrysler. But it seems very early to speculate on an acquisition by General Motors since Daimler doesn’t even seem sure it wants to spin-off Chrysler. It has said it won’t rule anything out but right now it’s announced plans are an internal restructuring.
Of course, hardly anyone buys that the announced restructuring will go far enough to turn around the troubled Chrysler division. So something bigger must be in the offing, right? But spinning off Chrysler poses more than a couple of problems. First, no-one really knows how to price Chrysler’s US business as a stand alone entity. It’s got earnings of $61 billion but took a sizeable loss last year. And as hot as the domestic US auto-parts business might be these days—helped out by a declining dollar making US manufacturing relatively cheaper—there really aren’t that many people clamoring to get into the business of designing, making and selling cars and trucks. Even Kirk Kerkorian seems to have thrown in the towel.
Let’s face it. If you are a private equity shop with a couple of billion in your pocket, do you get into the parts business with multiple customers or do you put all your eggs in one basket and pick up an entire auto-manufacturer? And do you really want to pick-up all those union, health-care and pension legacy costs? When the union strikes, do you want them boycotting the goods of every company in your portfolio?
And this is probably one reason the idea of a combination with General Motors won’t go away. Because if Daimler is selling, there probably aren’t all that many potential buyers. The New York Times story on a possible joint venture between Chrysler and General Motors involving a big SUV at least tells us that Rick Wagonner is talking to the Germans. (An aside: apparently, US car-makers still spend a lot of their time thinking about those SUVs. Now they just want them all to be hybrids.)
The story is being pushed most heavily by the Detroit auto press and rumor mill, especially Automotive News—folks who actually know a lot about what goes on in Auburn Hills, Flint and all those other Detroit-y places where cars are made. A lot of the speculation to be based on the fact that General Motors replied to questions about the possible merger with a terse “no comment.” But this seems to rest in part on a misunderstanding of the disclosure rules governing public comments by publicly held corporations. The board and management of General Motors probably have fiduciary duties to at least consider the possibility of combining with Chrysler—just as they had a duty to consider proposals last year coming from Carlos Ghosn about a three way GM-Nissan-Renault deal. That produced a lot of sound and fury, but signified nothing much. Here GM probably can’t say “no way, no how” right off the bat. But they can’t say much else either without issuing a press release and filing it with securities regulators.
Would the deal make sense? We’re hardly auto-industry experts but we can rattle off some more problems with the deal off the top of our caffeine-and-oxycodone addled brains. Take the potential dealership glut. What are they going to do with all those GM and Chrysler’s sales shops? Surely there’s way too much geographic overlap. (But then again, how much is this property worth? Maybe there’s some hidden real-estate value here.) And when did “bigger and bigger” become the future of US manufacturing? Is that the lesson we think GM learned from watching Chrysler’s combination with Daimler-Benz?
Another problem: GM boss Rick Wagoner is a tightwad. Remember the outsized dowry he and the GM board demanded from Ghosn when they considered the combination with Nissan-Renault? How much would GM pay up for Chrysler? 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.
Want to hear something really devious? Here’s the most under-handed “explanation” we’ve heard so far. And remember, this is all blind speculation by people who are prone to paranoid speculation (albeit people who have made a considerable amount of money trading on paranoid speculation). Here goes: the whole SUV joint venture has been a ruse to feel out Daimler’s dedication to Chrysler and to fish around for possible plans to sell to a GM rival. GM learned that Daimler was talking to someone—possibly Ghosn—and floated the GM-Chrysler merger rumors through the Detroit press to scare off the rivals. Too scheming? As the saying goes, we report (the unsubstantiated, irresponsible speculation), you decide (based on your own prejudices and gut-feelings).
But all this leaves us with a couple of questions: anyone know what Ghosn’s been up to lately? Where’s he been having meetings?