News on Wall Street that a secretive private equity firm is buying Chrysler sent chills through Main Street. Are the pensions and health care benefits of autoworkers safe? Would these evil hedge funders rip this faded American business to shreds and sell it off the highest bidders?
Unlikely. Chrysler’s new buyer is the highest bidder. Nowadays, with trillions sloshing around in private equity firms, you can’t buy anything with a lowball offer — even one of the Big Three automakers. Everybody thinks American automakers are one more recession away from bankruptcy. Everybody but Cerberus Capital Management that is.
Cerberus is the latest version of big money investors. The largely unknown, but increasingly powerful investment company effectively owns and operates a portfolio of unique businesses — sort of like General Electric on steroids. Some of the managers at Cerberus make more money than the CEOs running the actual portfolio companies they own by delivering big investment returns to their institutional and ultra high net worth clientele.
Before you roll your eyes and write Cerberus off as another investment plaything of the rich and the really rich, be aware it’s entirely possibly you own a stake in Cerberus (and therefore, the new Chrysler). While Joe Mutual Fund can’t invest directly in a Cerberus or any of its ilk, pensions that invest the retirement portfolios of ordinary government workers often do. Moreover, even if you have no direct financial interest in Cerberus’ success, like it or not they are now one of the most important players in whether there will even be an American auto industry in a decade.
Big Three Meets The Three Headed Dog
Cerberus is named after the mythical three-headed dog that guards hell. While the firm likes the idea of always having one set of eyes on guard, the three heads could also symbolize the three sides to Cerberus:
1) investment fund
2) dot com era incubator
3) government think tank/lobbyist.
First and foremost, Cerberus is an investment group. They take large, high risk/high reward stakes with other people’s money, often in dying companies. The managers of the fund get paid exorbitantly well — tens of millions per years — for successes on this front. Unlike more traditional hedge funds, there is little stock trading, derivatives, or shorting going on here.
Cerberus is more venture capital — or even vulture capital — than hedge fund. In fact, they are not unlike Internet incubator companies from the bubble years — investment companies that take large stakes in dozens of startups and offer capital and management guidance with the hope of big wins on some of the positions.
Unlike the “dot com” incubators, they are more an “old economy bomb” incubator – meaning they take big stakes in old-fashioned business that have fallen on hard times. Cerberus takes a more active roll in operating their portfolio businesses than a mere passive investor like a mutual fund.
Rather than invest in startups like Google, they are investing in shutdowns like Chrysler.
Then there is the government angle. Cerberus hires ex-government bigwigs and lobbyists for seemingly fishy but probably mostly (how’s that for confidence?) on the up-and-up connections with governments around the world — not a bad move since governments are the largest customers of all.
Cerberus has former Vice President Dan Quayle and former U.S. Treasury Secretary John Snow on the payroll — the former probably not hired for his cunning investing wisdom so much for some of that ole’ political magic that got him into the White House in the first place.
On the surface, you have a big mysterious investment fund playing slash and burn with one of America’s largest employers, gambling with America’s pensions in a high stakes heads Iwin; tails you lose gamble, all the while sending money Washington’s way to peddle influence and land deals for portfolio companies. It’s a movie-grade conspiracy scenario that makes Halliburton and the Carlyle Group seem like the Sierra Club — the political dealings being mostly Republican are icing on the cake. You can almost hear the typewriter keys banging away itching to slam this self-styled investor from hell. But it’s not the real story.
Cerberus is not a mere bottom fisher taking big stakes in down-on-their-luck businesses. They are a fund with a plan. While that plan may include financial wheeling and dealing to shore up Chrysler’s government-grade future benefit liabilities, the main goal probably is to keep Chrysler alive to profit from the second golden era of the American auto industry — one that could make Chrysler worth five times as much money … even more than buy high/sell low Daimler-Benz AG paid in their own AOL/Time Warner grade merger that made Chrysler a German car company.
Why Your Next Car May Be a Chrysler
What could possibly save Chrysler and the other Big Three Automakers (who are fast becoming the small three)? A rebirth of brilliant car design? Unlikely. The savior may be the same thing that could make many of Cerberus’s portfolio companies much more valuable: a falling U.S. dollar.
If the U.S dollar continues its multi-year slide, we may see a dramatic rebirth of the United States as a manufacturing capital of the world. Not only will Japanese and German cars be financially out of reach for many Americans, but Chrysler’s cars will be bargains to foreigners. Sure, they make some BMWs and Toyotas in America, but the U.S. appetite for cars exceeds our domestic production capacity.
Cerberus has been quietly building a portfolio of a decidedly old economy — North American manufactures.
• Blue Bird buses — a company currently moving production from other countries to Georgia (when was the last time that happened?)
• Formica — which makes “The Graduate”-era plastic countertops in California, Ohio, and Canada — is a company that could see big growth as the whole stainless steel-and-granite thing gets as stale as a McMansion.
• And lastly, CTA Acoustics — an auto parts manufacturer with a Corbin, Ky. factory.
While some of Cerberus’ portfolio companies are foreign, many (especially by portfolio weight) seem to benefit from a falling U.S. dollar. Even non-manufacturers like Tulsa, Okla. based Vanguard Car Rental Holdings (which runs rental car chains National and Alamo) would benefit by more U.S. travel — a big growth area if American’s can’t afford to go abroad and foreigners start finding America a bargain.
There are other benefits to Chrysler being owned by an investor group. Bankruptcy is unlikely for now; Cerberus can keep them afloat through a recession. Ford could use such a rich parent company. Then there is the real “synergies” — not the fabled ones behind ill-fated deals like AOL/Time Warner and DaimlerChrysler. Maybe National and Alamo will stop buying as many GM cars. Maybe you’re next car purchase will be financed by Cerberus. Cerberus bought GMAC from GM recently, and now gets Chrysler Financial — the auto-financing arm that doesn’t have a dangerous stake in questionable mortgages like GMAC. Cerberus can combine the two for real benefits (to Cerberus).
Cerberus certainly hired the right ex-White Houser to capitalize on the new weak dollar world. As Treasury Secretary John Snow once raised eyebrows when his comments were interpreted to mean that the United States welcomed a weaker U.S. dollar — a zinger the president and Snow had to tone done with generic free market platitudes.
If the U.S. dollar slide continues, Daimler may be the one in trouble while Chrysler may need to build a new factory. We’ll have to wait and see if the Germans made two big mistakes with Chrysler.
Jonas Max Ferris is co-founder of MAXfunds.com. He appears regularly on FNC's business program Cashin' In.
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