Cerberus LLC, the once powerful private equity firm, swept into Detroit in the autumn of 2006 to acquire a 51% stake in GMAC, General Motors' financial arm, and less than a year later it drove off with Chrysler, described at the time as the "capstone" of Cerberus' industrial empire. Never mind that the seller, Daimler, was only too happy to get rid of the auto company.
Today, Cerberus is backing out of those arrangements, ceding some control of its Detroit institutions in return for rich infusions of government aid. The first infusion came on December 19th when President Bush announced that Chrysler, along with GM, would receive $13.4 billion of emergency loans from the Troubled Asset Relief Program (TARP) after Congress had refused to pass a separate bailout bill. On Christmas Eve Cerberus got another last-minute gift when the Federal Reserve Board voted to permit GMAC to change its status to a bank holding company. (GM still owns 49% of GMAC). (See pictures of the remains of Detroit)
As part of the Federal Reserve deal, both GM and Cerberus will reduce their stakes in GMAC, a company decimated by the crisis in residential loans. Although created originally to finance GM's car sales, GMAC also got into residential mortgages, including the subprime variety. Result: GMAC has lost $8 billion over the past two years. Cerberus will distribute shares to its investors, thereby reducing its voting stake to 14.9% and its overall equity stake to 33%. GM will transfer some of its shares to a trust, which will sell off the stock over the next three years.
As a bank holding company, GMAC will have expanded opportunities for funding and access to capital, which will provide increased flexibility and stability. As part of the transformation, GMAC must complete a tricky $38 billion debt restructuring, getting bondholders to accept new terms and steep discounts. The deadline for cutting this deal with bondholders is this weekend but the details probably won't be available until next week.
GMAC also has applied for TARP funding and is counting on the benefits of its new bank status. "We'll also be able to broaden our deposit base as a bank holding company. We'll have access to more funds by ramping up our deposit taking over the Internet," says GMAC spokeswoman Gina Proia.
The sky isn't so blue for Chrysler, Cerberus' other problem child. Though the billions in TARP aid President Bush authorized for Chrysler and GM will buy Chrysler some time, there are difficult issues ahead. Unless labor costs can be brought down to parity with the foreign transplants, and without the restructuring of Chrysler's debt, the company cannot be restored to long-term health and the government loan will be unlikely to be fully repaid. (Read about GM's, Ford's and Chrysler's bailout plans)
Some industry experts are not optimistic about Chrysler's prospects. "I think (Chrysler) is going to have to merge," says Alicia Masse, managing director of BBK, a consulting firm-based in Southfield, Mi. that has done extensive work in the automobile industry.
However, GM, the only suitor to emerge this fall, has said it's no longer interested; another potential suitor, Russian tycoon Oleg Deripeska, is fighting to keep his own empire from being shredded by economic distress. Renault-Nissan, a third potential suitor, is pulling back in the face of what its chief executive, Carlos Ghosn, has warned could be a long global downturn.
Moreover, the financial crisis and drastic slump in sales that has sent companies like Toyota reeling has rocked Chrysler to its foundation. Four senior executives, including the chief marketing officer and the head of Chrysler's fledgling operations in Asia, have left the company in the past 10 days.
Chrysler also eliminated 25% of its salaried- employee positions on the day before Thanksgiving, and plans to press ahead with demands for more cuts from the United Auto Workers. Cerberus has agreed to utilize the first $2 billion of proceeds from Chrysler Financial to backstop the loan allocated to Chrysler automotive.
To conserve cash, Chrysler also was forced to close permanently a factory in Newark, Del. where it was building its only hybrid vehicle, and it has dropped plans for an alliance with Chery, an expanding Chinese auto company, after months of laborious negotiations.
Cerberus insists it is willing to stand behind the troubled automaker, but will that be enough? "Chrysler as we know it will cease to exist very soon," Kimberly Rodriguez, principal of the management consulting group Grant Thornton of Southfield, Mi., has flatly predicted.