Chrysler Buyout Saga Continues

Reuters reports that private equity firm Cerberus Capital Management LP is now DaimlerChrysler AG's preferred buyer for its Chrysler assets. This significant information, from people willing to talk to the Detroit News, suggests a shift in interest from the formerly preferred Magna International, a Canadian auto parts maker. The shift is significant because until recently, one of the primary differences between the competing bids was that Cerberus was willing to give the current management and employees a large ownership stake in the firm. Yet just on Thursday, Magna indicated that it was also willing to make similar concessions.

Since no official announcement has been made, this shift might be only the outward reflection of negotiations that occurred quite a while ago or even a complete fabrication designed to somehow influence the strength of the competing bids.

Nonetheless, one unmistakable view of the shift away from the traditional auto business buyer to a private equity concern is that DaimlerChrysler is responding to the continuing weakness of the American automakers. Private equity has recently taken on the role of buyer of last resort in the larger equity markets, snapping up companies that otherwise look sickly to industry insiders. If the Germans have come to the conclusion that management is sufficiently unable to right the ship at Chrysler, they must see the ability of private equity concerns to create additional value by dramatically increasing the leverage of Chrysler as a big plus.

The important thing to remember is that private equity concerns like Cerberus lack the industry specific knowledge of players like Magna have. They also tend to adopt a decidedly mid-term view, planning to sell the company in about five years. Running an organization the size of Chrysler is less akin to driving a lawnmower and more akin to driving a battleship in terms of its turning radius. It might take five years to turn the business around under the best of circumstances.

Last quarter Chrysler was the only major American automaker to keep its head above water. Ford and GM are in free fall and Toyota is seemingly unstoppable. Yet just a recently as 2005, Toyota recalled more vehicles than it sold. The American auto consumer is a fickle beast and winning today is no guarantee of winning tomorrow.