Chrysler: Anatomy of a private equity implosion

Posted Aug 10th 2009 1:00PM by Tom Taulli
Filed under: Private Equity

Steve Feinberg made a fortune in distressed investing during the early 1990s. So, when the financial system fell to pieces over the past couple years, it should have boon for his private equity firm, Cerberus.

Not this time. In fact, the New York Times has an extensive piece on the topic, covering Feinberg's folly on the buyout of Chrysler.

Yes, the deal was struck about two years ago, when the private equity market had reached its peak. Debt was easy to get. And, Feinberg thought that there would be lots of opportunities to slash costs (which is easier when a company is private).

Yet, there was still a good amount of skepticism. Was there upside with Chrysler?

If anything, Feinberg was getting himself involved in a complex organization. There were tough unions. Plus, in the world of mega competitors, Chrysler was niche player that had a limited product line (and the pipeline was fairly dry).

True, Feinberg saw an opportunity in the auto finance units. Even if Chrysler continued to be listless, there would be a buffer, right?

All in all, the model seemed spot-on. Of course, it did not account for a tough recession and credit crunch. Something else: with high fixed costs, car companies can burn through enormous amounts of cash when sales fall (Chrysler also had to pay interest on more than $10 billion in debt).

Ultimately, Chrysler had no choice but to tap the U.S. Treasury for a bailout. The upshot was that Feinberg's investment got crammed down. The initial transaction, which was for $7.4 billion, dropped to a lowly valuation of $1.4 billion.

Perhaps, Feinberg will be able to recoup his losses, but it will likely take some time. After all, the Obama auto-industry task force does not see an IPO for Chrysler until at least 2011.

Tom Taulli is the author of various books, including The IPO Primer and The Complete M&A Handbook.

Tags: Cerberus, chrysler