Gabriel’s scarcity rent – it’s management stupid!

Cerberus Capital Management: another style for private equity

7 June, 2007 at 11:18 am 3 comments

A few days ago I wrote about KKR and the three men behind that acronym. Now it’s the time for another company that lies in the private equity niche too, but, as you will see, plays its cards quite differently. In this article I’ll focus on the difference between them.

the original Greek Cerberus, a dog with three heads that guards the world of the dead and won’t let you in

Cerberus Capital Management was news just three weeks ago, when they announced they’d buy Daimler’s 80.1% stake in Chrysler for $7,400 million. Three months before the company had announced the laying off of 13,000 employees, after the red tape exceeded $1,500 million for 2006.

Not very good times for Daimler and Crysler. That was the end of a transatlantic marriage that lasted since 1998 and cost $36,000 million.

As you know, good times for private equity, bad times for inefficiencies and for corporate social responsibility: more laying offs ahead. More trouble in the Motor City: Detroit. And of course unions abhorring of letting private equity in, unions such as the United Automotive Workers and their leader: Ron Gettlefingers, warning about the dangers.

worried about the takeover? when this man speaks, Motor City listens

But something strange happened. Ron Gettlefingers, after some months sending the leave-Chrysler-alone message decided to back up the take over. Why? Who convinced him and how?

this is the man from Cerberus that convinced Gettlefingers: John W. Snow

What did Snow promise? Three things: to keep the same management team (I’m not sure that is a good idea after $36 billion having gone down the drain), to keep his three brands (well, without further analysis, looks sensible to think about consolidating the strongest only), and no further lay-offs and contract negotiations to be held this summer with the unions (which doesn’t mean that they’ll succeed either).

Will they be able to deliver? who knows.But that’s not the point.

They have credibility or, at least, they have a very different style. Cerberus managers are not perceived as elitist billionaires -and that’s a difference with KKR. Cerberus founder Steve Feinberg was son for a steel’s salesman, graduated in politics in Princeton while playing a lot of tennis. It has been said of him: “While other hedge-fund managers are collecting fine French wines and flying around in private planes, he drives a Ford truck and drinks Budweiser.” (Follow this link to a Businessweek article for the source)

most appreciated piece of art in Cerberus headquarters

It is said that the most valuable piece of art that is stored in Cerberus headquarters is a poster by the Fugees. Feinberg himself drives a pickup and wants no personal publicity. Half of their staff are ex-managers, a big number when compared to other companies that heavily relay on consultancies.

remember the one on the left? from US vice-president to Cerberus vice-president

Dan Quayle is also in Cerberu’s team as vicepresident. Not famous for his literacy or his perfect spelling, but close to the people. The same style that has made George W. president twice.

So, which are the main differences between the way of doing business of KKR and Cerberus?

• Cerberus are perceived as peacemakers, not as hard negotiators. Got nervous union leaders? they just hop on a plane and talk face to face plain conversations, making trust, opening bridges. As Buzz Hargrove, president of the Canadian Auto Workers (CAW) said on Feinman, “He gave us all letters that said there will be no job losses. He was very genuine, not some highfalutin billionaire. It was real talk.”
• And a financial difference: they don’t use leveraged buy-outs. That way the cost of borrowing money keeps lower. And, guess what, they talk to creditors too, giving them a lot of information and letting them participate. That makes trust too, and the more the trust, the less the borrowing costs also.
• Not worried about quick returns either. Let things take their time.

So, money is not everything, is it?

Entry filed under: b-school, Business, Economy, MBA, Microeconomy, Private Equity. Tags: .