Time Bound: Chrysler Given “10 Years” for Turnaround
You’ve got to hand to it Cerberus Capital Management. The private equity company buys two of the world’s largest automotive-industry companies at their peak price, yet still pitches the investments as smart.
Exhibit A is today’s New York Times article on Chrysler’s progress to date. In it, Timothy F. Price, a managing partner at Cerberus, upends conventional private equity wisdom: “Our market share is not really relevant this early in the game. Our objective is to make money here on a 10-year investment.” Firstly, the one-year anniversary of Cerberus’s purchase of Chrysler has already past. Not sure whether that’s included in the “10 years.” Secondly, according to the Federal Reserve Bank of San Francisco, private equity funds typically hold investments for three to seven years, although most private equity firms try to exit their positions within three years. And who really cares about marketshare anyway?
Still Cerberus and Chrysler tout their purported successes. As the Times reports:
Cerberus declined to release detailed financial statements for Chrysler, but Chrysler said recently that it had earned $1.1 billion in the first half of 2008 before accounting for interest, taxes, charges and other expenses.
“Those numbers don’t tell you much except that they apparently are satisfied with their cash flow,” said David J. Brophy, director of the Office for the Study of Private Equity at the University of Michigan.
Mr. Price of Cerberus said Chrysler was meeting “every financial metric” and had a $9.5 billion cash cushion to carry it through the current downturn. By comparison, General Motors, which is more than twice the size of Chrysler, has about $21 billion in cash.
But Mr. Price said the grim economic picture had forced even more cuts at Chrysler than expected.
“Obviously, there comes a point where you’re not able to make cuts faster than declining demand,” he said. “But so far we’re doing a good job.”
I wish Cerberus well, but it faces a profound challenge in Chrysler and GMAC. Then again, 10 years is a long time — for Cerberus to get paid for its investment.
