My understanding is that the car companies have large cash piles and large cash flows and lots of later-down-the-line obligations to retirees etc. So the obvious attraction is for new owners to spend the cash/return it to shareholders, and renege on pension etc deals.
Here's Delong on GM:
The fiscal year before last GM pulled in about $20 billion, of which $2 billion went to the pension plan, $5.5 billion to health care (for current workers and for the 2.3 retirees for every current worker), $9.5 billion to bondholders, and $0.7 billion to the tax guys--leaving $2.8 billion for the shareholders (on an equity base now valued at some $16 billion).
With stockholders receiving only 15% of the surplus from the business and yet having 100% of the votes, it doesn't look like a stable situation: there are enough flaws in our form of corporate governance to lead me to suspect that someone is likely to try something to redivide the GM surplus pie over the next five years. But it's not clear to me what, exactly.
http://delong.typepad.com/sdj/2005/03/general_motors.html
Also, Daimler paid something like $36 billion for Chrysler nine years ago, and Cerberus is now picking up the same property for $7.4 billion. Obviously they think they can run it better to get it up to its previous market cap.
The real question is what do the unions see in championing a buyout from a group with a history of "cost cutting"?
Chrysler's annual revenue is huge. That's about all there is to it. By taking the company private, Cerberus will have the flexibility to do what they want with the company to make it consistently profitable. This is what private equity firms do.
The prospect of private ownership had alarmed Chrysler's labor unions, which had come out strongly against the sale of the company, fearful that an investor might try to break up the company or seek deep cuts in wages and benefits.
I think that's the attraction for Cerebus.
2 - As far as I know, the current relations between the UAW and GM are pretty poisonous; I can't speak for how Chrysler rolls with them, but UAW management might be swayed by promises being given by the Cerebus people. Also, frankly, I think the UAW is right to be terrified -- between non-union foreign car plants in the U.S. and contracts and pensions getting sliced by parts manufacturers who got pressed into bankruptcy by the Big Three, it's very easy for me to imagine a future without a UAW. This might be half a loaf thinking.
As to Labs' question, they could be thinking anything from "foreign sales look good" (which is the case for GM and Ford, dunno about Chrysler) to "we can sell chunks to greater fools" to "once we destroy the unions or get Congress to pass universal health care, this company will be insanely profitable". In point of fact, they're probably thinking about the joys of the management fees of putting all this money to work.
One less mouth to feed is one less mouth to feed.
1: Yeah, before GM had a couple good quarters that rescued their share price, they had more cash on their balance sheet above their bond debt than their entire market capitalization. Since pensions and health care guarantees were sucking up so much of future revenues, the ideal situation for shareholders at the time would have been management paying off all the bonds, then distributing the remaining cash as a giant dividend for an instant 10-20% return on all shares, then immediately filing for bankruptcy.
Needless to say, the unions were not amused by this being mentioned.
Cerberus can do similar things to GM. Essentially, they renege on past commitments to extract huge cuts in current costs, then sell the company on before the broken trust bites them in the ass. This was done to a major airline in the round of bankruptcies in the 70s or 80s, when a private equity company took the airline over and slashed salaries by about 50-75%. It was very possible in the short-term, as the pilots were being very overpaid compared to what new flight-school grads would work for, but it led to real problems in staff retention. Of course, by then, the private equity firm had sold on.
get Congress to pass universal health care, this company will be insanely profitable
Yeah, this is what I was thinking, although I was thinking "pension bailout" rather than universal health care.
It seems obvious that whatever happens will involve ratting on the pension and health care commitments.
Even a three-headed dog needs a nice ride.
2
Actually the $7.4 billion is not going to Damler but being invested in Chrysler so Cerebus is basically getting the existing company for nothing. Shows just how bad Damler's $36 billion investment was.
So Cerebus is giving Daimler-Chrysler $7.4b, D-C is plowing that cash into its Chrysler wing, and then it's giving Cerebus the Chrysler wing?
I don't get it.
Also, everyone involved looks pretty much like a stereotypical plutocrats.
What I learned from that article is that the funny-looking bald German gentleman from the commercials really is the CEO of Daimler. Who knew!
Ah:
As the release itself explains:
Cerberus is contributing $5 billion into the new company (this does not go to Daimler). And another $1.05 billion goes into the financial business (this, again, does not go to Daimler.) Daimler gets $1.35 billion (but will loan the new company $400 million.)
So Daimler makes about $1 billion then, right? Actually, no.
Like a politician obliquely saying "mistakes were made," Daimler goes on to say that the restructuring "will give rise to a cash outflow" of $1.6 billion.
In sum, the net outflow will be about $650 million, plus another $878 million of "prepayment compensation", Daimler says. And that's how a $7.4 billion windfall actually turns into a bill.
12: As best as I can reckon, D-C gets rid of a liability, but gets a one-fifth stake in a viable company in exchange.
15
Daimler hopes they are rid of a liability but if Chrysler doesn't stay solvent for a decent interval its creditors can and will go after Daimler.
