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For Private Equity, A Very Public Disaster

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http://www.nytimes.com/2009/08/09/business...ml?ref=business

FOR Steve Feinberg, the onetime owner of Chrysler, the past year has been a crawl toward defeat. He lost billions of dollars. He lost prestige. He lost his privacy. And he ended up a ward and supplicant of the federal government.

But, even now, Mr. Feinberg, a man who can play a decent game of chess while blindfolded, is hard-pressed to pinpoint many mistakes. Sitting in his office on Park Avenue, far away from the detritus that surrounds Detroit, he grows pensive when asked what he has learned from his audacious — and failed — effort to privatize and resurrect the legendary and deeply troubled auto giant. “I don’t know what we could have done differently,†he says, crossing his arms on his chest. “From the day we bought it, we worked hard to improve it.â€

He pauses, pondering, as the clock ticks away. Then he shakes his head. “We were too optimistic on timing,†he says. “Maybe what we should have done was not bought it.â€

Mr. Feinberg took over Chrysler almost exactly two years ago, promising to revive the company. Chrysler filed for bankruptcy protection at the end of April. So how he and his private equity firm, Cerberus Capital Management, choose to describe their journey with Chrysler is a delicate matter.

If he says he should have shelled out more money to help Chrysler, he could face the ire of investors who have already suffered heavy losses on his gambit. If he says he should have simply dumped Chrysler’s auto arm, while clinging to its more promising finance unit, he could be accused of caring more about his wallet than he did about Chrysler’s workers and the automaker’s role in the economy.

Mr. Feinberg’s education at the hands of Chrysler, the government and economic reality is emblematic of the limits private equity players have encountered as they’ve sought to reap outsize returns while also contending that they had the smarts and managerial prowess to repair companies of any size. Not too long ago, some pundits and analysts wondered whether private equity firms — backed with a rising tide of easy bank loans — could gain enough traction to make runs at seemingly untouchable behemoths like General Electric.

Not buying it would have been the best option. He managed to buy a turd.

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I was amazed that Cerberus bought Chrysler, because if you look at their model lineup and geographic spread, they are about the least attractive of the US automakers in a recession.

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I was amazed that Cerberus bought Chrysler, because if you look at their model lineup and geographic spread, they are about the least attractive of the US automakers in a recession.

I suspect the core business model was quite simple.

buy it, make sure the Mercedes technology continues. Flog off the car companies to the Chinese (especially Jeep and the Voyager,, which is where the brand was), sending the employees and, more importantly, the unions and their excessive (today) demands with them. For the plants no-one wants, shut them and get rid off ther unwanted brands with them.

Geographic spread was poor, but look at Chevrolet - massive in places like Russia - even if it is just flogging old Daewoos.

Use the proceeds to pay down the mezzanine debt and take out a lot of the PIK notes and expensive paper. Issue a highish yield debt offering to be in the money, then flog off the finance arm.

It went wrong, probably not because of the price they paid - it was a basket case whatever they paid for it, but because their model won't have priced in oil at 147 a barrel or the banks collapsing. Black swan or whatever, these were the trigger - my view is that buying Chrysler was a race against time anyway - it was a mess and was doomed to fail in its ridiculous behemothic form - so the window to buy, split and sell was narrow - and was shut by the credit crunch and oil spikes.

In other words, it was always a massive risk to buy the damned thing - but they got carried away because it's a 'jewel' to be able to buy it. And so they dived in, two feet first. Wrongly.

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"If he says he should have simply dumped Chrysler’s auto arm, while clinging to its more promising finance unit..."

Does'nt that just sum the madness up? Who needs to build actual goods?

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