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— Private Equity —
The New York private equity firm had taken control of not one, but two giant companies whose fortunes were tied to Detroit. Late last year, battered by the recession, both went on government life support. In April, Chrysler LLC, the automaker that Cerberus and a group of co-investors bought in August 2007, was forced into bankruptcy and its assets sold to Italy's Fiat SpA. The other holding, GMAC LLC, General Motors Corp.'s financing arm, which a Cerberus-led group took control of in November 2006, has sought refuge in taxpayer capital and become a ward of the government. Even though Cerberus limited its own downside exposure to Chrysler and GMAC, investing a little over $3 billion in the pair, it was responsible for drumming up the $7.4 billion of equity that investors sank into each. Much of the Chrysler money is gone, wiped out in the bankruptcy, while only a fraction of the equity outlay in GMAC may ever be recovered.
Cerberus knew it was in for a bumpy ride from the moment it took Chrysler off DaimlerChrysler AG's hands. The deal was an audacious would-be turnaround play, not a conventional buyout. Instead of piling on debt to finance its purchase, as happens in a leveraged buyout, Cerberus and its co-investors injected money into the business. Fully $6 billion of the $7.4 billion went to shore up Chrysler's money-losing manufacturing and finance operations. Daimler got just $1.35 billion in cash from the 2006 sale while retaining a 19.9% stake. (The billions of dollars of loans Chrysler took out at the time of the deal were to fund operations, not the transaction itself.) To earn a decent return, Cerberus had to achieve a feat that had long escaped Daimler: restore Chrysler to profitability. That goal would elude Cerberus, too, but not for want of trying. It brought in high-profile leaders to remake the company: Robert Nardelli, a former top General Electric Co. executive who had been forced out as CEO of Home Depot Inc., was named chief executive, and Jim Press, a former president and COO of Toyota Motor Corp. in North America, was hired as vice chairman and co-president. The only high-ranking holdover was Tom LaSorda, Chrysler's former CEO, who shared the vice chairman and co-president roles with Press. Chrysler slashed thousands of jobs and cut production in an effort to bring costs more in line with its revenue. It also charted a bold plan to drop slow-selling models and ramp up production of the kind of smaller, fuel-efficient cars that sell well in Asia and Europe, where Chrysler had no presence. At a briefing for journalists in early 2008, Press predicted that if the turnaround succeeded, it would create a "new paradigm" for innovation in the ossified industry. In the end, Chrysler did not buckle under the weight of LBO debt. Rather, the recession and a sharp downturn in the market for cars doomed it. Nardelli's grand plans never got off the drawing board. Chrysler's fall didn't completely obliterate Cerberus' investment. That's because some of the $7.4 billion was hived off to Chrysler's auto-finance unit. When Chrysler went bankrupt, the finance unit's operations were absorbed by another Cerberus-backed company -- GMAC. GMAC's woes are nearly on a par with Chrysler's. That wasn't always so. In late 2006, when a Cerberus-led group bought 51% of GMAC, the lender was zooming along like a souped-up 'Vette. Indeed, the reason GM spun it out to Cerberus was to inoculate it from the automaker's mounting problems, which were menacing GMAC's close-to-investment-grade credit rating. GMAC's crown jewel was its Residential Capital LLC mortgage-lending subsidiary, which had posted a $1.02 billion profit in 2005. Then the mortgage crisis hit, turning the crown jewel into a yawning money pit. As ResCap's mortgage losses soared, GMAC had to pump billions of dollars into it to keep it going. In 2008, the downturn caught up with GMAC's auto-financing business, throwing GMAC's survival into doubt. Late last year, a desperate GMAC opted for the Troubled Asset Relief Program cure -- transforming itself into a bank holding company in order to tap the Treasury's TARP. The feds kicked in $6 billion, but Cerberus was forced to break up the bloc of shares it controlled and pare down its stake as a condition for GMAC becoming a bank. In May, the Treasury came through with a further $7.5 billion for GMAC after a "stress test" it conducted exposed an $11.5 billion capital hole. If need be, the government, which seems determined to spare GMAC, in part to safeguard its huge investment in GM, is expected to come through with the remaining $4 billion. The feds' largess probably will guarantee GMAC's survival. But it won't bail out Cerberus' enormous equity investment, which the government has crammed down and diluted vastly. At the same time, Cerberus is lucky it has any stake left in GMAC at all.
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Cerberus Capital Management LP's headlong leap into the auto sector turned into a Thelma and Louise-style drag race into the abyss.
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