The Most Dangerous
Deal in America
Condé Nast Portfolio
September 2007 issue
By Daniel Roth
This is what the people came for, but Stephen Feinberg looks as if he’d
rather be anywhere else. He stands motionless on one end of the
sprawling stage, practically hiding behind a lectern decorated with the
massive golden coat of arms of Manhattan’s Waldorf-Astoria. The Wall
Street investors who pack the room sit expectantly, ignoring—for the
first time all morning—their BlackBerrys, which scroll silently in
their pockets.
Feinberg, who is 47, sports thinning brown hair
and a wispy mustache. Without any notes, he launches into a meandering
speech. Between long pauses, he wends his way through market analyses
that seem deliberately vague. At the heart of his speech, he sums up
the philosophy that guides his company: Reveal as little as necessary;
be anonymous; be invisible. “We try to hide religiously,” he says. “If
anyone at Cerberus has his picture in the paper and a picture of his
apartment, we will do more than fire that person. We will kill him. The
jail sentence will be worth it.” There are a few nervous laughs.
Since graduating from Princeton 25 years ago, Feinberg has never given
an interview and has never been photographed by the press. Not that
there has been much demand until now. On Wall Street, the C.E.O. of
Cerberus Capital Management, an investment firm with $26 billion in
assets under management, has long been admired. (“You probably think
you’re smart,” says one former employee. “Now take your brain and mine,
take them to the 28th power, and you have Steve Feinberg.”) To the
general public, though, Cerberus has been just another shadowy buyer of
companies in an already overpopulated field. The firm’s purchases
include a grab bag of brands that lurk on the edge of consumer
consciousness: Fila sporting goods, Mervyn’s department stores, Alamo
and National rental cars, Air Canada, the GMAC lending arm of General
Motors.
All that changed on May 14 when another mustachioed
C.E.O., Dieter Zetsche of DaimlerChrysler, announced he was selling
Chrysler to Cerberus for $7.4 billion. (Daimler is retaining a 20
percent stake.) It marked the historic end of the German carmaker’s
cross-cultural business experiment and the return of an American icon
to U.S. soil. Feinberg didn’t even bother to appear at the press
conference.
"We hesitated [at making the deal],” he says at this meeting a month later, the annual gathering of Cerberus investors, “because we knew it would get an insane amount of press, and boy, we don’t like that. But the deal was so good.”
Now the question is whether Feinberg can turn the battered auto manufacturer around or whether this might finally be the deal that gets the best of him. In an industry of damaged companies, Chrysler is almost a total wreck: It has sunk to fourth place in North America, the market on which—unlike its competitors—it is almost entirely dependent. Nearly 75 percent of its business comes from sales of increasingly less popular light trucks, such as the four-wheel-drive Jeep Grand Cherokee, which was ranked by the Environmental Protection Agency last year as the least-fuel-efficient S.U.V.—an impressive distinction. Chrysler controls less than 10 percent of the hot market for crossover utility vehicles. And it owes its retiree medical plan more than $17.5 billion. The day after Zetsche announced the sale, the company revealed that in the first quarter of 2007, Chrysler’s revenue had dropped 11 percent compared with the same period the previous year, and it had swung from an $857 million operating profit to a $2 billion loss. “There’s no economic justification for Chrysler Corp. to exist,” says Gerald Meyers, the former C.E.O. of American Motors and a professor at the University of Michigan’s Ross School of Business. “Whatever they can do, someone else can do better.”
Feinberg won’t be able to escape the spotlight as he tries to save Chrysler. This will be his riskiest, most public buyout. Even before the deal closed, it sent the market careening. Hedge funds and other investors, who for so long had a seemingly unlimited appetite for risky corporate debt, suddenly backed away from the table. In late July, they refused to buy $20 billion in Chrysler debt—just under a third of the total value of the loans Cerberus is taking out to fund the automaker’s operations—at the interest rates and under the conditions that Cerberus wanted. Its bankers (including J.P. Morgan Chase, Goldman Sachs, and Citigroup) were left on the hook, having committed to financing the deal. They were able to place $8 billion of the debt, only at higher interest rates and with tougher terms. And they were forced to sit on another $10 billion, which they hope to sell later. Cerberus and Daimler agreed to assume the remaining $2 billion.
If it had gone through, the debt offering would have been the largest of the year. When it didn’t, it became the biggest warning sign that the buyout boom might have ended. “The risk is being transferred to the banks,” says Brian Horey, president of the hedge fund Aurelian Management. “Eventually, the banks will choke on the stuff, and the whole leveraged loan market will grind to a halt.”
The concern was never whether the deal would go through. But how will banks react if they’re stuck with tens of billions of dollars of Feinberg’s debt? The answer to that could affect Cerberus for years. “Cerberus is not really staking its financial health on turning Chrysler around,” says another hedge fund manager. “It’s that its reputation is at risk.”
Feinberg is also being monitored by Washington, with Congress eager to see what he is going to do with—or to—Chrysler’s nearly 80,000 workers, most of whose jobs are in the political-battleground states of Michigan and Ohio. In the past few months, in the wake of Stephen Schwarzman’s $449 million payday from taking the Blackstone Group public, Congress has found private equity to be a crowd-pleasing punching bag. Should Feinberg decide to order massive layoffs or gut Chrysler, his peers worry that the fallout from Washington would be swift and merciless. “We’re in a very populist era,” says Wilbur Ross, whose eponymous private equity firm has invested heavily in the auto world since 2005. “You become an easy target with any kind of successful thing. But you become an especially easy target when there are labor cuts and then you turn out to make a lot of money. It feels to people like you’re doing it off the back of the worker.”
Feinberg doesn’t need his peers to like him; it’s not as if he’s out socializing with them. “Regulator scrutiny is going to grow big,” he tells the Waldorf crowd. “Private equity firms will start getting accused of things unfairly. We have to keep a thick skin.”
Putting his words into action, two days after closing the deal, Feinberg tapped a controversial outsider, Robert Nardelli, to be C.E.O. of Chrysler. During his stormy tenure at Home Depot, Nardelli alienated stockholders, executives, and employees with an imperious attitude and a massive pay and severance package. He may be the last executive in America you’d appoint if you were concerned about perception instead of performance.
But then, Feinberg is not trying to win a popularity contest. “Carl Icahn works through the public media when he’s doing deals,” says a former Cerberus executive. “Other guys want that same attention. Steve Feinberg doesn’t. He has a very clear scorecard. And he’s winning.”
Stephen Feinberg currently sits on top of a collection of companies that employs roughly 250,000 people and generates annual revenue of more than $120 billion. If you added them all up, they would form the ninth-largest business in the U.S., with sales greater than those of Pfizer, Microsoft, and United Airlines combined. Feinberg runs multiple private equity and hedge funds under the Cerberus umbrella, and these have produced outsize returns, consistently beating the performance of rival funds.
Feinberg never set out to be a corporate titan. While building Cerberus in the early 1990s, he focused on buying debt in economically distressed firms and then negotiating his way into control. The work took place largely behind the scenes: having one-on-one discussions with executives and lawyers, maneuvering creatively in bankruptcy courts, and seeking out partners to merge with or to sell to—all to trigger a big payday. But he kept his eyes open for new ways to make money. After the recession and corporate bankruptcies following 9/11, banks began to clamp down on their lending. Feinberg jumped in to fill the void, dramatically expanding his loan operations. (His stand-alone banking division, called Ableco, as of this spring had $2.5 billion in available capital.) As hedge funds began competing in the area, Feinberg migrated into private equity, looking for companies he could restructure and run.
But squeezing money out of firms that weren’t in distress required different skills. Feinberg went out and bought them. He hired 150 C.E.O.’s and other top executives to form an active brain trust—paying them, according to a competitor, around $500,000 a year—to field calls from Cerberus employees, find and weigh in on deals, and open up their Rolodexes. But the big payday for these executives comes if Feinberg places them inside a company and they are given a large equity stake, often for the first time in their career. Other private equity firms have tried something similar, but not on this scale. In the past year and a half alone, Feinberg has brought on more than 60 new executives, from the former C.E.O. of the massive British insurance company Prudential to the former chief financial officer at Bank of America. “None of these top guys are working for their salary,” says Tim Price, a managing director at Cerberus. “They’re working because they’re driven to make a difference. They’re highly skilled, and they want the intellectual stimulation. They feel like they’re fighting on the side of the angels.”
Once they’re full-time, Feinberg, who is typically one of the first to come into Cerberus’ Park Avenue office and one of the last to leave, expects these onetime big shots to put in just as much effort as he does. “No one at the office goes out to lunch,” says one employee. William Richter, the firm’s co-founder, puts it this way to investors at the annual meeting: “We still have the intensity that Steve Feinberg had on his first day, and that is passed down through the organization. Anyone who loses sight of it is quickly reminded.”
There is little at the office to distract staffers from the business at hand—almost no art on the walls, no fancy woodwork. “It’s not a place you bring clients to impress them,” says a former employee, who adds that those in the satellite offices refer to headquarters as the Death Star. The unadorned office is an extension of Feinberg’s personality. He is almost pathologically self-effacing. When Price joined in 2001, the firm’s headquarters were so crowded that Feinberg offered to share his office with him. When Price’s phone rang, Feinberg would take a message, never bothering to introduce himself. “He hates big egos,” another former employee says. “His ego is having no ego.”
Cerberus’ private equity team meets every Monday evening. Somewhere between 50 and 60 people gather in a large conference room; another 40 or so call in. The team runs through various deals, with the key executives involved with each talking about challenges and opportunities. Feinberg doesn’t guide the meeting as much as ask leading questions. When one executive has a problem, Feinberg will call on others to discuss how they dealt with a similar issue.
Cerberus does its own research rather than farming it out to a consultant such as McKinsey & Co. or Bain & Co., as is typical for private equity firms. At Cerberus, this do-it-yourself, demanding, labor-intensive approach is bred in the bone. Many of the 300 people doing the everyday work have been plucked from the ranks of unlikely industries, such as telecom and packaged goods. Feinberg seeks out those with hidden talent and, says a competitor, wants them hungry to move up the socioeconomic ladder: “You look at these people, and they don’t look like Wall Street blue bloods.”
Feinberg has also tossed out Wall Street’s typical hierarchy. “Everyone talks to everyone,” Price says. “There’s no chain of command. It’s absurd to think you’d have to talk to your supervisor—if you could figure out who your supervisor is—about whether you could go see Steve about something. If you needed Steve’s help, you’d be expected to talk to him.”
When Cerberus pulls the trigger on a new purchase, it executes a detailed 100-day plan. “In every deal, there’s always a honeymoon period,” Grant Gregory, a Cerberus operations executive and the former head of what is now Deloitte & Touche U.S.A., explains to investors at the annual meeting. “You can do a lot in those first months.” Of course, it’s not necessarily a honeymoon if you’re on the other side. Cerberus reassesses all employees of the company it’s buying and, according to Gregory, their compensation. Cerberus’ transactions are rarely hostile; it tries to work with management. But once Cerberus is in, it doesn’t hesitate to start slicing. In late November, Feinberg bought a 51 percent stake in G.M. finance arm GMAC. By June, he had replaced or shifted the jobs of more than half of the top 19 executives at the company’s ailing residential-lending group. These changes included installing a new C.E.O. and a new head of U.S. operations, cherry-picked from a different company in Cerberus’ portfolio.
Sometimes Feinberg doesn’t wait that long. In the spring of 2006, Jeffry Bust, the C.E.O. of Blue Bird, a manufacturer known for building school buses, approached Cerberus about being acquired. When Blue Bird was sold in August 2006 for $165 million, Bust put out a press release calling the acquisition a “significant step forward” for his company. A couple weeks later, he was unemployed. “They didn’t really have a place for me that was attractive,” says Bust, now an executive at a chemical firm. Feinberg never visited Blue Bird headquarters in Fort Valley, Georgia, and never even met with Bust.
Fixing a broken management team is just one of Feinberg’s techniques. The bulk of the work goes into “blocking and tackling,” as Feinberg puts it—cutting expenses, expanding product lines, changing prices, and finding ways to bring in partners. Cerberus bristles at accusations that it’s quick to sell assets. “We’re long-term partners, not ‘strippers and flippers,’ as it’s called in the press,” Mark Neporent, Cerberus’ chief operating officer, says at the annual meeting. Tim Price later adds, “We’re more like a conglomerate in a way. Instead of find, fix, and flip, it’s find, fix, and hold.”
That might be a noble aim, but Cerberus’ guiding mission is to create returns that beat the market without incurring high risk for its investors. “Cerberus is a very pure place,” a former employee says. “You are there to make money.” Stripping is an integral part of the game, and Cerberus excels at it. Its purchase of Albertsons provides a revealing case study. After buying 661 underperforming Albertsons grocery stores for more than $1 billion in June 2006, Cerberus quickly started selling them off. In February 2007, it made back more than half its investment by unloading 128 stores on Save Mart Supermarkets. By May, the portfolio was down to 358 stores, and Cerberus is still looking for buyers. Then there’s EntreCap, formerly the leasing arm of Pitney Bowes. Feinberg spent almost two years negotiating a $747 million purchase of the division. Shortly after the acquisition in July 2006, Feinberg & Co. decided to wind it down. First, Cerberus refinanced EntreCap, earning back its entire $77 million equity position. Then it sold off various assets and portfolios, raking in a $300 million gain in less than a year. Cerberus expects to make another $150 million when it sells the rest of the company’s assets.
Feinberg finishes his analysis of the investment market and moves on to an explanation of the culture inside Cerberus. He wears a gray suit and speaks in a raw, suburban-New York accent. The only sign of polish is a small white pocket square. “There’s a sense of, What can we do today?” he says. “Past returns are sort of irrelevant. There’s no resting on our laurels. That’s the first rule for everyone at our shop. The minute that changes, we’re in trouble. No one person or two or three people are irreplaceable. Including me.”
Still, he does call out two people by name: former vice president Dan Quayle and former Treasury secretary John Snow, stalwart Republicans whom he tapped to be Cerberus’ co-chairmen. Quayle may not be much admired in his own country, but he’s big in Asia, where he has helped close several deals. Feinberg has recently dispatched Snow to D.C. to lobby against any increase in fuel-economy standards for automobiles. (The last thing he needs is to have to retool Chrysler plants to make new engines and lighter bodies.)
“You know, with other firms, Dan Quayle’s and John Snow’s roles would not be full-time jobs,” Feinberg continues. “In our case, John and Dan work full-time, killing themselves. They work as hard as our people. Sometimes I worry about them. I think John is 68 now, but he has the energy of a 30-year-old. Our rule is that there’s the same set of rules for everybody. We sometimes lose senior executives because of that.”
When seen from the air, Greenwich, Connecticut, resembles a tableau of tiny fiefdoms: sprawling homes of the hedge fund and private equity kings, woodlands buffering each regal spread. They pass each other as they drive in and out of their country clubs. Stephen Feinberg has every right to be here. Instead, his house sits 15 miles away and could pass for a Greenwich guest cottage: a 4,500-square-foot, blue, two-story house that sits among seven other similar residences in a modest cul-de-sac. He bought his home 16 years ago for less than $600,000.
Feinberg has worked
hard to stay anchored to his roots. He grew up less than an hour away
in the middle-class town of Spring Valley, New York, where his father
worked as a steel salesman. In high school, Feinberg threw himself into
tennis, spending late hours cheering on teammates even after his own
matches were over. Feinberg’s mother, Madeleine, died while he was a
sophomore at Princeton; he later named one of Cerberus’ lending
operations Madeleine L.L.C.
He played tennis in college, where
his intensity only increased: At times he would come onto the court
wearing eye black, to the puzzlement of the rest of the players. By his
senior year, he had become team captain and was named All-Ivy in
doubles. “I was the Southern evangelical Protestant; he was this
Northeastern Jewish guy,” recalled his doubles partner, Talbot Davis,
now a pastor in Charlotte, North Carolina. “We had a lot of heated
conversations about religion and politics, but in the end, we still
really loved each other. He was so passionate. Everything he did was
intense. He could be sick sometimes and not practice well but go out on
the court and still be amazing.”
Feinberg also served in
R.O.T.C., a biographical detail that took on a life of its own when he
later rose in the business world. One competitor talks about Feinberg’s
years as an Army sharpshooter; a former employee says that he thought
Feinberg used to jump out of helicopters with Special Forces. According
to Department of Defense records, however, Feinberg’s service ended
midway through his senior year. Though his stint was short, he served
with his usual focus. When a classmate mentioned that he was having
trouble with his marching, Feinberg insisted that the two practice
immediately—even though they were in the library. “People probably
thought we were wacko,” said the marcher, Dan Sykes, who now manages a
small education company. “Steve didn’t care. He was a get-it-done
person, and he wanted to get it done.”
After school, in 1982, Feinberg joined Drexel Burnham Lambert, the junk-bond shop that would help define the Wall Street
years, before it came to an ignominious end when its star, Michael
Milken, was convicted of illegal securities trading. Later, Feinberg
jumped to the brokerage house Gruntal & Co. In 1992, at 32, he
teamed up with Bill Richter, 17 years his senior and the founder of his
own investment firm, to start Cerberus. They named their new company
after the three-headed dog that guards the gates of hell in Greek
mythology. The company has long held that the symbolism refers to the
fact that one eye is always open, presumably protecting investors’
money. Tim Price recently told New York Times language
columnist William Safire that the founders just thought the name
sounded “pretty cool.” Price added, “Now, frankly, we’re torn. It’s a
terrible brand name, but we have a ton of equity in it. What to do?”
In
the early days, long hours meant Feinberg had little time to see his
wife, Gisela, or his young daughters; he now has three. Though the
family splits time between the home in Connecticut and an Upper East
Side co-op, he clings to the ideals of middle-class life. He reportedly
drives a Ford pickup truck and avoids the Manhattan social circuit. The
idea of throwing himself a lavish party—say, the way Blackstone’s
Stephen Schwarzman did on his 60th birthday—is completely alien to
Feinberg.
Lindsey, his oldest daughter, is entering her junior year at college. She recently asked her father to buy her a car but says she knew better than to ask for a foreign model. “I was lucky to get him to agree to any car, because he was like”—and here she drops her voice an octave in playful imitation—“The first car that any teenager gets has to be a broken-down piece of trash that cost them $500 that you got used from a crackhead dealer.” She says her father constantly drills her and her sisters on the importance of hard work. “My dad doesn’t want to spoil us. I live on the Upper East Side. I see a lot of spoiled kids.”
Feinberg has traded his tennis rackets for rifles. His new hobby is big-game hunting. On family trips to Colorado, he leaves before dawn, comes back midday, and takes his daughters on a hike. A few trophies have been sent to the taxidermist’s for mounting. “My guy friends are always, like, sketched out,” Lindsey says. “ ‘I don’t want to be with you. Your dad is going to shoot me.’ I’m like, ‘No, he’s not like that. He’s really chill. He’s a really laid-back guy.’ ”
Feinberg has been speaking for 15 minutes now, but no one is shifting in his seat, even though there is no map to where he is heading. Other Cerberus presenters offered tables and charts for attendees to flip through during their speeches. Feinberg’s section of the meeting guide is one page, blank except for the words “Market Overview, Stephen Feinberg.”
He’s now on a tangent about the U.S. economy. “This credit bubble—as some are calling it—if it collapses, it hurts our ability to refinance debt and find an exit. But we have much less leverage in the business [than other private equity firms]. On the other hand, boy, we make our share of mistakes!”
The threat of economic turmoil doesn’t scare Feinberg. He’s thrived in that environment before, and he’s prepared to do it again. “We haven’t downsized our traditional distressed team, which buys bank debt and public debt, even though the market is dormant,” he says. “When the corporate market starts going down, we’ll have our whole public distressed group ready to go.”
Feinberg is clearly proud of what he’s built and what his company can accomplish in any weather. As Snow explained later, “Mr. Feinberg would have been great on a Bobby Knight basketball team. It’s the team, it’s the team, it’s the team—that’s his core philosophy.”
The floor of the Toledo North Assembly Plant looks like a giant indoor amusement park, spread out over 2 million square feet. The shells of Jeep Wranglers, Jeep Libertys, and Dodge Nitros glide up and down orange metal tracks, moving through stations where the vehicles are painted, welded, and assembled by the site’s 3,400 employees. In mid-May, though, it felt more like a zombie town, as workers took in the news that the Germans were selling Chrysler to Cerberus. “It was like a train hit us,” recalls Michele Mauder, a 22-year employee who joined with workers from the U.S. and Canada in an unsuccessful bid to arrange an employee buyout of the company. They didn’t like the idea of being sold to a private equity firm—especially one named after a three-headed hellhound. “They had an intent when they named their company,” says Mauder. “They didn’t name it after a fluffy white puppy. It’s not exactly welcoming to employees.”
The workers had been holding their breath since February, when Zetsche announced a reorganization of the division: 13,000 jobs cut, one plant idled, and two more scaled back. “All options are on the table,” he told reporters when asked about rumors that the company might cut Chrysler loose. In fact, Cerberus executives had been shuttling to and from DaimlerChrysler’s headquarters in Stuttgart since November; other potential buyers, including Blackstone and auto-parts supplier Magna, were also in talks. Cerberus analysts spent countless hours in Germany, as well as in a war room set up on the 23rd floor of its office back in New York. There, at nearly all hours, staffers combed through the carmaker’s records, logging into a secure server set up by DaimlerChrysler to allow access to thousands of files. In the end, Cerberus would throw 250 people into performing due diligence.
So far, no one at DaimlerChrysler is willing to talk about how Cerberus prevailed. But a former Chrysler executive says he knew Feinberg would win the moment he added Wolfgang Bernhard to his brain trust, appointing him to lead part of the due diligence. Bernhard had been Zetsche’s right-hand man while both were at Chrysler, from 2000 to 2004. Tall and handsome, Bernhard was a former McKinsey consultant who had gone on to oversee Mercedes-AMG, the division of DaimlerChrysler that makes limited-edition sports cars. While Chrysler would at times drag Bernhard out to be the face of the company, what he loved was staring at the financials and finding cuts. And he was a savvy executioner. To the amazement of others in the company, he’d travel to suppliers and drop in on union leaders to go through Chrysler’s books line by line, showing them how, unless sacrifices were offered up, everyone would be out of work.
When the DaimlerChrysler board passed over Bernhard for a promotion—despite the very vocal protests of his close friend Zetsche—he left the company and became chairman of the Volkswagen brand, a job he exited in January. Soon afterward, Feinberg put Bernhard on the Cerberus team. Speculation that Bernhard would be named chairman of Chrysler was rampant, and Cerberus did nothing to discourage it until after the deal closed, when Chrysler announced that he had passed on the job. (Feinberg also lured other former Chrysler executives to help him put the deal together, including Tom Gale, the designer behind Chrysler’s sporty Dodge Viper, and Gary Dilts, a 30-year veteran who was senior vice president of sales.)
In the end, Feinberg negotiated a deal that will break the company into two parts. He’ll invest $5.4 billion in the automotive division and a little more than $1 billion in the financial unit, which handles leasing and lending for dealers and customers. Daimler gets $950 million. According to Lenard Tessler, the co-head of U.S. private equity for Cerberus, who also spoke at the June investors meeting, $220 million of Daimler’s haul will come from a mortgage that Cerberus plans to take out on Chrysler’s Auburn Hills, Michigan, headquarters.
In any ranking of corporate dealmaking, limping away with $1 billion after putting in more than $36 billion—Chrysler’s price tag when Daimler-Benz bought the company in 1998—must sit near the very bottom. But Daimler decided to go even lower. It agreed to lend Chrysler $400 million, keep the U.S. automaker’s $38 billion debt and pay the interest on it, and cover the costs of the restructuring announced in February. All of that together amounts to a $680 million cash outflow from Daimler. In other words, Feinberg has persuaded Daimler to pay him for taking over Chrysler. The pleasure is all Cerberus’.
“This was a great deal,” Bernhard tells Cerberus’ investors in New York. He rips through three reasons: One, DaimlerChrysler just finished spending a “mountain” redesigning its front-wheel-drive system (meaning Cerberus won’t have to). Two, Chrysler is about to launch a new line of minivans and pickups, vehicle types that have boosted the company’s market share when new models have debuted in the past. “Three,” he says, “Daimler was desperate.” The crowd roars with laughter. “Or, more politely,” he continues, “they were motivated to sell Chrysler.”
The last straw for
Zetsche, as Bernhard saw it, was one that Cerberus could work out: the
union issue. In 2005, Ford and G.M. came to a compromise with the
United Auto Workers that allowed them to steer guaranteed wage
increases toward paying off skyrocketing health-care costs. When
Chrysler asked for a similar deal, the union balked. Unlike Ford or
G.M., DaimlerChrysler actually made money—$3.4 billion that year—so
why should rank-and-file workers be asked to make a sacrifice? “Dr.
Zetsche found out that the biggest problem with fixing Chrysler was the
profitability of Mercedes,” Bernhard said. Without Mercedes, Chrysler
is a money loser and should get the concessions, he argued. If the
union agrees to give Chrysler a similar break to the ones it gave G.M.
and Ford, the savings would be worth $340 million a year, according to
AlixPartners, a consulting firm. Union chief Ron Gettelfinger, who
before the sale dismissed private equity firms as “strip-and-flip
artists,” has since begun negotiations over concessions. (The irony is
that Chrysler’s new owner is hardly struggling: Since 1999, Cerberus’
private equity funds on their own have racked up gains of more than $4
billion.)
The union concession alone wouldn’t be enough to make the economics work, but Cerberus has a few other tricks. To drive sales, it wants to improve “quality perception” by focusing on the feel and ride of Chrysler’s cars, and it has high hopes for new diesel technology DaimlerChrysler developed that will be introduced in 2011. Cerberus negotiated a technology-sharing pact—royalty-free—with Daimler for research done during the merger years. That should keep R&D costs down for a while.
Of course, the cars could flop, the diesel technology could turn out to be insufficiently green, consumers could keep moving away from pickup trucks, plants might have to close—and Cerberus could still make its money. At its investors meeting, Lenard Tessler estimated that by July 1, Chrysler’s automotive division would have $5 billion in cash on hand, and its financial unit an adjusted book value of $7.2 billion. Cerberus’ 80 percent stake would be $9.8 billion—36 percent above its initial cash investment. In other words, Feinberg was already up $2.6 billion, and he hadn’t even closed the deal. (Of course, this was before the credit market froze in late July.) The key will be to keep Chrysler’s financing operation humming, and with Cerberus’ stake in GMAC, it should be able to increase efficiency and opportunities.
If investors wanted to own a car company, though, they could have just bought DaimlerChrysler stock. Instead, they’re hungry for the big payday: the sale, partnership, or public offering that will reap billions. Cerberus insists that it is in Chrysler for the long haul. “We never buy a company with an exit strategy,” Snow has said repeatedly. That doesn’t mean that Cerberus won’t exit—or at least partially cash out—if opportunities come its way. Still, Snow says, that’s not the plan. “We buy to fix and hold.”
But workers at Chrysler remain skeptical. “It’s like everyone who says they have no plans to run for president and then runs,” says Mike Parker, an electrician at Chrysler’s Sterling Heights, Michigan, assembly plant, which pumps out the Dodge Avenger and Chrysler Sebring. “I mean, this is what Cerberus does. Why in the world should we think they won’t close or flip this plant?”
Feinberg knows he has to convince people that Cerberus’ intentions are honorable. For all of his secrecy, he is remarkably persuasive when he applies his personal touch. Since early summer, he’s been making the rounds on Capitol Hill with Snow and Thomas Boggs, the legendary lobbyist who helped persuade the government to bail out Chrysler in 1979. Their pitch is that Cerberus’ purchase of Chrysler puts the great American company back in American hands. They’re also arguing, as is the rest of the auto industry, that proposed increases in fuel-economy standards shouldn’t be draconian. So far, the limited talking tour seems to be working. “I think that a lot of us at this point are willing to work with him in good faith,” says Michigan Democratic senator Debbie Stabenow.
When Feinberg recently visited her D.C. office, there was little small talk. He told Stabenow that he came from a blue-collar background and was doing this to remake a great American car company. Stabenow says she hopes he follows through. “If, in fact, what he says turns out not to be accurate, or if he’s not acting in good faith, I certainly would be very upset.”
It seems as if Feinberg could talk for another hour, but he’s decided to wrap it up. He has already explained why investment banks steer deals his way: “We’re honest with them and don’t get into maneuvering.” He has covered the new need for the company to keep Washington happy: “It’s an area we never thought we’d have to get into,” he says. He’s talked about Europe, describing it as “real fertile ground.”
He has also taken a rare dig at competitors who are raising funds in the tens of billions of dollars: “I’m sure you’ve heard from every private equity firm that there is no amount too big for a private equity firm to handle—the more the better. We haven’t grown our funds as much as most. We have to balance our ability to have the capital we need but not get so big that it dilutes returns.”
Throughout the entire speech, almost nothing has moved except his lips. Feinberg’s tone hasn’t fluctuated; he hasn’t shifted his weight from side to side. “Now I’m totally rambling, stream of consciousness,” he abruptly says. “I’ll end here.”
The investors start stuffing notes and documents into their bags. Feinberg walks down the stairs, blending into the crowd.
