Download Cerberus Capital Management Acquires Chrysler Corporation

Business Reorganizations and Restructuring
Unit FIVE Assignment
Case Studies (13-4)
Prepared by
Paul Bird
Prepared for
Roger Mayer, DBA, CPA CIA
For submission
May, 24 2011
CERBERUS CAPITAL MANAGEMENT ACQUIRES CHRYSLER CORPORATION
Case Study 13-4: Cerberus Capital Management Acquires Chrysler Corporation
Discussion Question 1
The apparent motivation sparking the deal from Cerberus’ perspective was more
opportunistic and capacity building than any other conclusive deductions. According to the
case, and it would appear a foregone conclusion based on similar deals, these kinds of
leveraged buyout transactions initiate on the premise that private equity investors acquire and
go private then regenerate or resurrect the ailing entity with for a future profit sale. To aide in
its effort, Cerberus used the mortgage the entity assets so as to provide funding whatever
acquisition price decided upon. With the uncertainties of future cash-flows, Cerberus had to
invest personal funding so as to keep the entity afloat until its long-term goal comes in sight. It
also thought that with existing synergies with GMAC, it would be able to strike borrowing
relationships with the federal government.
As it relates to capacity building, Cerberus also hoped to build its capital base so as to be
able to provide lending opportunities. It banked on many hopeful possibilities such as to create
alliances with other entities and spread much of the acquired risks around, including retiree
health-care liabilities, plus eliminating duplicate jobs and combining those with potential
overlap. However, with the financial market threatened to buckle over, much of the fanfare and
optimistic expectations took a different spin. The government had to pump billions in the
entity, representing a $6b preferred stock stake in the attempted resurrection but still other,
but a lot more shedding had to take place in what seemed much of a hasty deals than anything
else.
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CERBERUS CAPITAL MANAGEMENT ACQUIRES CHRYSLER CORPORATION
From Daimler’s perspective, it would appear a genuine deal was being sought so as to
create some kinds of synergies, of which only an inference of it could be made. It was willing to
take on responsibilities so as to allow the alliance to materialize. It was made to retain its
existing 19.9 percent ownership/equity whilst still providing loan to the combination so as to
mend looping gaps in financing. Taking a public entity private was not in all cases a fully
declarative move towards liquidation, but to allow footing to be regained for possible
acquisition at a later date. Daimler might have been eying this possibility too, but may thought
that the alliance was more geared towards continuity. It might have believed that firm would
continue to do well and it wanted to stay on and ride with the bounces.
Discussion Question 2
There were risks that seemed to be intertwined in the alliance, especially regarding its
eventual success. The presence of a very sizable debt and uncertainty regarding future cashflows, the future success seemed to have installed by these huge stumbling blocks. As a result,
he wanted to strike a deal with UAW towards assuming responsibility for the retirement plan so
as to lessen its burdens and reduce its labor costs currently being experienced. Another risky
move made was with the belief that an alliance with GMAC would allow it to cut costs by
eliminating duplicate jobs whilst at the same time combining whatever jobs were viewed to be
overlapping. Cerberus’ intent of being able to borrow from the federal government was not
place on sound footing, either as there seemed to have been too much thoughtless haste in its
ship-jumping hastily arrived at decisions. It just seemed to have lost focus, taken-on more than
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CERBERUS CAPITAL MANAGEMENT ACQUIRES CHRYSLER CORPORATION
it could possibly chew and had to be playing catch-up games from thence – its initial
investments.
Discussion Question 3
Economies of scale occur when an entity is able to spread fixed costs over increasing
production levels (DePampilis, 2010). Potential economies of scale and scope seemed evident
in a number of ways. Economies of scale were likely to be realized in the two-firm alliance with
GMAC and Cerberus. The consolidation hoped to slash costs by eliminating duplicate jobs,
combining overlapping jobs functions and operations, as well as in combining back office
operations. These were all attempts capable of impacting the issue of efficiency in operations
and eventually reduce production costs. This reduction in production costs could allow for
cheaper services and products to be passed on thereby increasing revenue. As a result, costs of
production could positively be influenced. With this reduction of production costs, not only that
greater benefit could be passed on to client-base whilst tapping into other market share, and
eventual revenue growth. Additionally, expenses could reduce significantly and gives it the
renegotiate debt instruments and lessen its burdens.
Economies of scope could come about by using existing data centers to increase the
number of possible loans it could generate. Also, potential economies of scope could have been
realized if the attempt to acquire funding from the Federal Reserve, it might be able to provide
cheaper loan services to its customers and potential customers alike. Also, synergy considered
with Fiat, could allow it to use Chrysler’s technology in exchange for a 20 percentage stake. The
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CERBERUS CAPITAL MANAGEMENT ACQUIRES CHRYSLER CORPORATION
existing technology could allow for greater existing resources to be used to grow other
opportunities and generate future income.
Discussion Question 4
This distribution of ownership was decided upon base on the fact that Cerberus
seemingly had the capacity to fully absorb the acquisition costs and Daimler choosing to remain
with its stake of equity. Cerberus, being a capital management firm, must have thought that it
was able to adequately complete the deal, but later-on realized it wasn’t in a good position to
assume same. Maybe, Cerberus had done this kind of acquisition before and Daimler thought it
was in a financial strength and robust planning to allow a smooth take-over.
Additionally, this kind of a deal was atypical of private takeovers, which allowed private
equity owners to use either the target’s assets or cash flow to use as collateral. Because
Cerberus is the main instigator, it seemed to have proposed to assume that portion of equity
not held by Daimler. Cerberus wanted to call the shots and this percentage ownership allowed
it to basically be in control of all moves going forward.
Discussion Question 5
It would appear that a bad business plan, or no formally structured and meaningful due
diligence ensued. The deal seemed so hastily arrived at that the acquirer was not even aware
that enough cash-flow was not being generated by the entity so allow for the proper collateral
to be had so as to secure proper financing. Additionally, the size and magnitude of the
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CERBERUS CAPITAL MANAGEMENT ACQUIRES CHRYSLER CORPORATION
Chrysler’s retiree health care plan seemed to have not been fully known, as contingency plans
could/should have been made to take care of this issue.
All the subsequent plans of the acquiring firm were seemingly hinged on suppositions,
and aspirations. There were statements in the excerpt revealing that ‘Cerberus was counting
on paring retiree health-care liabilities with…; …it also expected to benefit from melding
Chrysler’s financial unit with Cerberus’ equity stake in GMAC..’ among other partial thought out
intentions. There seem to be no evidence of what exactly the next more will be and levels of
confidence embedded in the respective undertakings. With Cerberus, a capital management
entity acquiring striking such an alliance without proper thoughts and know-how of the entity
operations was not able to transition the entity into any form of success. With Daimler being
the minority shareholder, its efforts and decision-making seemed stifled as not much was said
about subsequent contributions away from the equity share,, loan and debt absorption.
Discussion Question 6
Cerberus chose the corporate structure of Limited Liability Company (LLC) because of
the legal protection that it provided. By choosing this type of structure, it is able to keep the
new firm separate and apart from its main operation – capital management. Therefore, should
the entity fail to turn around, its investment and risk is only limited to what is committed to the
venture. The Chrysler brand and entity was ailing, and as a result the takeover or buyout was a
risky one with no known certainty to convince of a future turn around. This form of business
could also allow for favorable tax benefits to be had where profits and loss could be transferred
through to owners without being taxed.
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CERBERUS CAPITAL MANAGEMENT ACQUIRES CHRYSLER CORPORATION
Additionally, an LLC allows for alliances to be created while keeping ownership confined
to a particular culture or foreign investors so as to keep contracts in-tact, customers and other
clientele base, suppliers, patents, copyrights among other key issues. This allows for the buyer
to learn the operations of the Joint Venture (JV) whilst at the same time growth the entity for a
possible merger with the parent or sale.
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Reference
DePamphilis, D. M. (2010). Mergers, Acquisitions, and Other Restructuring Activities, 5th ed. P.
cm. – (Academic Press advanced finance series).
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