Wednesday, October 29, 2008

Cerberus & Big Auto: PEU Memories

Cerberus Capital Management purchased a stake in General Motors financing arm GMAC in April 2006. A year later it bought 80% of Chrysler from Daimler, the owner of Mercedes Benz. The move reduced Chyrsler's debt, making it a leaner and meaner company.

John Snow, Chairman of Cerberus told the Financial Times his view of private equity:

The way we approach private equity, it’s to buy companies that are under-performing, fix them, hold them. We’re patient, we can take the long view. We’re interested in the real metrics of the business, not financial engineering, so deals that don’t depend on 50 basis points, that are solid, that are real, that have the chance to create fundamental improvements on the way an enterprise operates, they’re still going to get done, and there are lots of under performing businesses, they’re all over the place.

So private equity still has a big role to play, and that role is important to keep the economies of the United States, Europe and other places strong because, as private equity steps in, improves the fundamental performance of these businesses, it’s also enhancing the fundamental efficiency of the economy and allowing resources to recreate larger outputs, raising standards of living. That process is very positive, and will continue.

The financial implosion happened mid-September. Uncertainty shut down consumer's wallets and they postponed big ticket purchases, like automobiles. So what did stable Cerberus do with its auto companies?

First, it took total control of GMAC in early October. Then it discussed combining GMAC with Chrysler's financing arm. Finally, it approached the Treasury for designation as a commercial bank, enabling it to get relief in the $700 billion Treasury's bailout program.

Did it help to have an ex-Treasury Chief as Chairman? John Snow served in that role for President Bush for three years. Private equity underwriters (PEU's), line up at Hank Paulson's bailout window. Why am I continually surprised at the Bush administration's creativity in fostering Corporafornication?