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DATE News (chronologically)
02/16/08
automotive
Cerberus lays out worst-case for Chrysler
Cerberus Capital Management LP on Friday defended a letter the private equity firm sent to investors that acknowledged it faced "significant risks" with its investment in Chrysler LLC.

In a statement, Cerberus characterized the letter as merely laying out "worst-case scenarios" and said the private equity giant was committed to its investments in Chrysler and its 51 percent controlling stake in GMAC, the former General Motors Corp. financing arm. GM retains 49 percent of GMAC.

"Cerberus has an obligation to be forthright with our investors about all possible risks and uncertainties that could impact their investment. Although we prepare for the worst-case scenario, it doesn't mean that it will certainly happen -- in fact, we are committed to doing everything in our control so that it doesn't," Cerberus said in a statement Friday. "Our business model is based on seeing value where others don't and creating value when others can't."

The risks to Chrysler outlined in the Jan. 22 letter to investors include a "potent recession" or a "meltdown in the automotive market," or the collapse of the automotive finance market, which could impact Chrysler Financial's ability to fund car loans.

But the letter also emphasized that Chrysler could handle an "ordinary recession" and the current weakness in the credit markets.

"We believe we bought (Chrysler) very cheaply, and we do not need to be heroes to earn a good return on the investment," Cerberus' managing member Stephen Feinberg and senior managing director William Richter wrote in the nine-page letter.

"We do not need to transition the car industry or even to return Chrysler to a much stronger relative position in the U.S. car market in order to be successful. Even though we have higher hopes of deeply and fundamentally improving Chrysler, solid blocking and tackling and reasonable execution should be enough to earn a good return."

Gerald Meyers, a professor of business of the University of Michigan and a former chairman of AMC, said the letter was designed to "lower expectations."

"What's the secret to success? It's lower expectations, and the letter is designed to get people off their backs," Meyers said. He said the letter was a dumb move, calling it "morale-crushing" for Chrysler employees. The letter went to investors in Cerberus' Institutional Partners Series Four investment fund, the private equity firm's most recent fund. The $6 billion fund focuses on "poorly performing middle market companies in the United States and Asia," and was created in late 2006.

In the statement Friday, Cerberus also reiterated its support for Chrysler management.

"Chrysler is already on track to exceed its multi-year restructuring and recovery plan on virtually all key metrics," the statement said.

Feinberg praised Chrysler's management, calling it a "dream team" and tweaked Daimler AG, which still owns 19.9 percent of Chrysler. "We believe Bob (Nardelli) is one of the best and toughest CEOs in the country, which, in our view, is exactly what the auto industry needs," Feinberg wrote. "Tom LaSorda, the other co-president is the former CEO who managed Chrysler as an orphan piece of Daimler. He did a fabulous job under the circumstances." More at Detroit News
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