Tuesday, November 6, 2007

Chrysler and the Fallibility of Private Equity


Chrysler and the Fallibility of Private Equity
November 1, 2007

Chrysler’s statement Thursday that it would cut 11,000 jobs — on top of the 13,000 layoffs it announced in February — came as a surprise to many industry watchers. “The market situation has changed dramatically,” Chrysler’s chief executive, Robert L. Nardelli, said.

It also raises a few questions: Why didn’t Chrysler’s owner, the buyout firm Cerberus Capital Management, foresee this when it bought the auto maker just five months ago? After all, haven’t private equity chiefs built their billions on the idea that they are more farsighted than just about anyone else?

Cerberus isn’t the only private equity firm whose crystal ball is looking a bit cracked these days. J.C. Flowers apparently failed to anticipate the passage of a new law reducing government subsidies to student lenders, legislation that it says disproportionately hurts Sallie Mae. The Blackstone Group and Lone Star Funds tried to buy mortgage lenders as that market collapsed, in deals that are or were on the verge of collapsing.

According to The New York Times, auto industry sales in February were running at an annual rate of 17.2 million vehicles. But Mr. Nardelli said Thursday that sales had softened since then, adding that the company expected the slower pace to continue into 2008.

At the outset of his tenure, Mr. Nardelli had said he planned no big changes to Chrysler’s latest turnaround program. ‘’They got it,'’ he said of Chrysler management at the time. ‘’If we can do it faster, if we can do it more efficiently, that’s what we want to do.'’

When Cerberus selected him as Chrysler’s new chief executive, many observers, and Mr. Nardelli himself, noted that he lacked auto-industry expertise. But he was picked for his operational skills and experience, honed during his rise at General Electric. He was also known as a hard-nosed boss, one who routinely took employees to task and was unafraid of making hard decisions.

It is at least a little surprising that Mr. Nardelli and his team, then, didn’t see the market conditions eroding. However, it’s also true that in taking companies private, buyout firms can make the changes they need to away from the public eye, without angry shareholders to drive the stock price down.

Thursday’s additional job cuts could leave egg on the face of the auto unions. As Daimler prepared to sell Chrysler, Buzz Hargrove, the head of the Canadian Auto Workers Union, said that handing the company keys to a buyout firm would be the “worst-case” scenario.

“Our fear is private equity,” Mr. Hargrove told The Washington Post in March. “They are not out to build cars. It could mean throwing a lot of people out of work and then reselling” the company.”

Yet the unions were brought round to Cerberus as a new owner. In a statement announcing the Chrysler sale, the United Automobile Workers’ president, Ron Gettelfinger, said the deal “was in the best interests of our U.A.W. members, the Chrysler Group and Daimler.”

On Thursday, Mr. Hargrove of the Canadian union said at a news conference: “This is a huge hit to us.”

Of course, it’s possible that the Cerberus crew did see this coming — but decided to wait until now to announce the extra layoffs to ease the blow.

No comments: