DaimlerChrysler Deleveraging as Private Equity Ramps Up

Reuters reports that DaimlerChrysler's CFO Bodo Uebber has announced that the company will significantly reduce its use of corporate debt. At a time when private equity group Cerberus is using enormous debt to leverage its commitments to Chrysler, DaimlerChrysler is moving in the exact opposite direction.

Just how much does DaimerChrysler plan to reduce its reliance on commercial paper? Almost completely. The company will not issue bonds "in the quarters ahead". Daimler AG, as the company will be known once the Chrysler sale is complete, is making a strange decision.

The price of corporate debt is quite low and doesn't appear to be rising in the near term. Companies that engage in leveraged buyouts, like Cerberus and KKR, are on a tear making investments in otherwise uninspiring companies based almost entirely on their observation that those companies are under-leveraged.

MBA students around the world have long learned how to calculate the appropriate balance between equity and debt that maximizes the profits of shareholders, yet companies have consistently been far more financially conservative than those calculations suggest they should be. Of course, their are other costs associated with taking on excessive debt that cannot be expressed in purely financial terms. Many wealthy individuals are uncomfortable with taking on significantly more risk by increasing the debt of their businesses.

Still, the rewards of leverage remain clearly visible in the new leveraged buyout firms that are remaking the business world. DaimlerChrysler is making a decision to reduce its risk profile at a time when much of the smart money is betting in the opposite direction. Only time will tell who is right.