This is the first in a two part series on the role of private equity firms at two specific companies. This first piece examines the role of Cerberus at Chrysler.
I caught a very interesting article during the middle part of last week written by Dan Gerstein for Forbes entitled: “Chrysler’s Hidden Coffers”. The article, largely critical of Chrysler’s request for bail-out money due to its private equity deep pockets, suggests Chrysler’s specific request for bailout money had less to do with helping save jobs or keeping manufacturing here in America but as the author quotes a NY Times article, to prevent “one of the world’s richest and most secretive private equity companies,” from having to take a “modest” financial hit.
The Forbes article goes on to beat up the private equity firm, “Cerberus has barely tapped any of its massive holdings –its investments in Chrysler are estimated to be just 7% of its assets under management –to stabilize Chrysler’s precarious finances; the exception was a $2billion loan in July. Instead, the company has shed 30,000 jobs, a specialty of cost-cutting corporate flip artists like Cerberus.” The point about not putting up any capital is relevant but the beauty of “flip artists” is that they aren’t afraid to do what is typically needed – cut waste and get out of unprofitable business lines. And we all know Chrysler has plenty of duds in its portfolio.
So the fact that Cerberus has not put much – if any – skin in the game, remains the paramount issue. Gerstein even cites a Business Week article which states Cerberus got Chrysler “essentially gratis”. That news makes it all the harder to swallow any kind of bailout request from Chrysler. The notion of stakeholders putting some skin in the game has received some press recently ( my husband is quite proud of the idea of making the auto execs and UAW leadership offer personal loan guarantees). But it seems absurd that a financial player buying up Chrysler wouldn’t put some of its own finances into the mix.
Cutting heads or upping the financial stakes may still not be enough to save the Big 3. Some say the Big 3 don’t produce cars that we want to drive but the truth is nobody is buying cars right now. Toyota and Honda are also hurting. The difference, I believe, has to do not so much with innovation but with lean manufacturing. Toyota and Honda live and die by lean. GM, Ford and Chrysler, no matter how much lip service paid to the subject, do not. Lean companies hunker down in tough times. They survive. True, labor costs are not the same amongst the Big 3 vs. the transplants and foreign owned firms. But when you are lean, you don’t have waste throughout your business processes, your inventory, your staff and your executive band. We should be telling Cerberus that to save Chrysler, you need to change the culture, the incentives and the directives. You need to make Chrysler live and die by lean. Any bail-out should hinge on this.