Naughton: What Cerberus Wants From Chrysler

Detroit was stunned Monday morning to wake up to the news that Chrysler had been sold to Cerberus Capital Management, a Wall Street private equity firm named for the three-headed dog that guards the gates of Hell. The unsettling news grew even more ominous when one of the Detroit TV stations began broadcasting the news conference live from Germany with a stern-sounding German translator drowning out the English being spoken by DaimlerChrysler Chairman Dieter Zetsche. It all reminded me of that R.E.M. song "Welcome to the Occupation."

But then the charm offensive began. Sitting between Zetsche and Chrysler CEO Tom LaSorda on the dais in Stuttgart was the avuncular John Snow, the former Treasury secretary who is now chairman of Cerberus, a $23.5 billion private equity investment firm that owns such household names as Fila and Formica. (More importantly, it has amassed several auto holdings, including a controlling stake in GMAC, the financing arm of General Motors) Far from appearing like a Wall Street sharpie eager to carve up Chrysler, Snow spoke in soothing tones about continuity. "There will be a continuing relationship between Daimler and Chrysler," he said, looking fondly over at LaSorda. "That's a vote of confidence, Tom, in you and in us." And now that Cerberus is taking Chrysler private in a $7.4 billion transaction, Snow assured his new friend Tom that he would no longer have to operate in the pressure cooker created by having pesky public shareholders. "We can let 'em focus on running this great company," Snow said of the automaker that lost $1.5 billion last year, leading Daimler to unload Chrysler after nearly 10 years of unhappy marriage. (Daimler will retain a 19.9 percent stake). Best of all, though, Snow was "absolutely delighted" to have the backing of United Auto Workers President Ron Gettelfinger. "Having the support of Ron Gettelfinger tells us a lot," he said. "We respect the role of organized labor."

At that point, this deal was being coated with so much sugar it was making my teeth hurt. So I thought I would strip away the sweetness and shed a little light.

For starters, this is no bailout like Chrysler received from Congress a generation ago. Back then, Chrysler was an American icon that President Jimmy Carter saw as an engine of the U.S. economy. While Chrysler will once again become an American company in this deal, the U.S. economy is no longer defined by Detroit. If it were, we wouldn't have a 13,000 Dow and low unemployment while Detroit's three automakers hemorrhaged more than $16 billion in red ink last year. Cerberus is not out to save Chrysler for the good of America. Rather, Cerberus' goals are succinctly explained by University of Michigan business professor Gerald Meyers, who was at the wheel of American Motors when it sold out to Chrysler back in 1987. "Cerberus' game is all about build it up, sell it and get out," says Meyers.

And how might Cerberus make Chrysler look profitable? It will make it shrink to fit its diminished place in the American automotive market. Since rising gas prices flattened the tires of the SUV business, Chrysler really has only had a couple of strong model lines left—its minivans and the Jeep brand, which has the classic American appeal of Harley Davidson. Chrysler still sells a lot of Dodge Ram pickups, but the roof is falling in on that market along with the housing industry. LaSorda has already announced plans to cut 13,000 workers and close factories. And Chrysler officials insisted Monday there would be no more layoffs. But analysts predict Cerberus will want more. Why? Because Chrysler's current cuts are aimed at holding on to 13 percent of the U.S. car market, when it actually may only be able to profitably control 10 percent, says Meyers.

Cerberus' seemingly cozy decision to keep LaSorda in charge will not be without limits, either. Watching over him will be Wolfgang Bernhard, Chrysler's former No. 2 exec who is now an adviser to Cerberus and will likely get a board seat in the new Chrysler Holding LLC. "Let's face it, LaSorda may be nominally in charge, but there's a new owner in town," says veteran auto analyst Maryann Keller. "Cerberus' man on the line here is Wolfgang Bernhard."

Perhaps the biggest fallacy among all the public platitudes Monday is the notion that LaSorda will have more breathing room by not being part of a public company. "That's baloney," says Keller, author of several books on Detroit and adviser in many Wall Street auto deals. "The problems at Chrysler have nothing to do with public ownership and the scrutiny of investors in New York. American investors were bit players in Daimler stock." The real pressure will come with private ownership, which is far more focused than millions of public owners scattered around the world. "The idea this is going to make things easier at Chrysler is crazy," says Keller. "This makes things tougher because as soon as something goes wrong you'll have Wolfgang Bernhard in your office. That's direct, in-your-face pressure."

The most mystifying turn of events, though, is the UAW's apparent acquiescence in this deal. A month ago, Gettelfinger said he had "grave concerns" about the private equity players circling Chrysler, which included Cerberus and the high-flying dealmaker the Blackstone Group. He saw them as carving up Chrysler and selling off pieces to the highest bidder, while destroying jobs and communities. "I call 'em strip and flip," he said then.

So why would Gettelfinger do his own apparent flip? Well, his support is extremely guarded. In a press conference Monday, Gettelfinger grew edgy as he tried to explain why he lost his bid to keep Chrysler a part of Daimler. "I'm going to go through this one last time," he said. "The status quo was off the table. The decision to go with Cerberus was already made before we got there" in Germany Saturday to meet with Zetsche and LaSorda. After the execs laid out their rationale in a four-hour meeting, the union boss huddled with his advisers and decided to back it as the best alternative to staying with Daimler (which never warmed to Chrysler's down-market cars and trucks or truly adopted its American cousins). "The point is, you're dealt a hand," says Gettelfinger. "And you play with the hand you're dealt."

But Gettelfinger's play could be calculated. When Chrysler enters contract talks with the union this summer, Gettelfinger holds a big trump card with the $18 billion in health and pension costs Cerberus agreed to take off Daimler's hands. Cerberus would dearly love to cut those crushing costs, which help explain why all American auto makers have a hard time making a buck. The best way to pare down those costs is to get concessions from the union. But the union will want something big in return, like job guarantees or other goodies. After all, Cerberus has very deep pockets. Why should the union turn a cold shoulder to the new owners before they've heard what they have to offer? Gettelfinger seemed to acknowledge that was how he was playing his hand. "We believe we'll get a lot of mileage out of where we're at with our position," he said.

How many miles Cerberus will ride with Chrysler is uncertain. Some analysts believe Cerberus will hold onto Chrysler for the length of one union contract—four years. Then it will likely put a smaller, more profitable player back in the public domain through an initial public offering of stock. "Cerberus wants to show a company coming back with the potential to be extremely profitable," says Meyers. "Then here come the investment bankers to do an IPO. And everybody at Cerberus becomes a billionaire." But before Chrysler, and Cerberus, arrive at that happy destination, they'll have to drive through the union first. They'd better fasten their seat belts.