Trying to understand Cerebus...
11-18-2008, 10:34 PM
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Trying to understand Cerebus...
First off..Cerebus is one of the best run, and brightest capital managment firms out there. That being said..I am trying to wrap may arms around what exactly they are doing here.
First of...things we know.
Cerebus owns controlling interest in GMAC, Chrysler Financial, and Chrysler. The only reason GM sold controlling interest in GMAC to them is because GM's junk bond rating would not allow them to get GMAC credit at decent rates. Basically Cerebus is GM's cosigner for GMAC. One important note..Cerebus bought Chrysler after it bought GMAC..so it was not like GM knew they were selling their financing business to what would be a competitor.
A few reading points-
http://en.wikipedia.org/wiki/GMAC
http://en.wikipedia.org/wiki/Cerberu...tal_Management
So that leaves us wondering...
First off...Cerebus seems to have figured out the the loan business is much better than the car business..and wants to get rid of Chrysler. The problem is...both loan businesses (GMAC and Chrysler Financial) depend on a health GM and Chrysler. Cerebus seems to think the best way for this to happen is with GM and Chrysler to combine, cut the fat, and let Cerebus have a small stake on the board while owning both captive finance comapnies.
Now we all know that Cerebus is using restricted lending by GMAC as a way to bring GM to it's knees. For a while GM (and most dealers) have made more money financing cars that building them. Now the million dollar question is...Since the merger seems to be off, why is Cerebus still using GMAC to strangle GM?
Can anyone make a resonable argument? I mean..they are in a pretty odd position because they own Chrysler, and Chrysler financial...but they also own GMAC who's success is directly tied to the fortunes of a competitor in GM. That means they can't just use GMAC as a tool to outright strangle GM out of business because then it would also take down Chrysler suppliers?
The only reasonable argument I can think is that maybe my making GM's situation more dire, they accelerate government loan money to both Chrysler, and GM which will in turn help their financing business?
First of...things we know.
Cerebus owns controlling interest in GMAC, Chrysler Financial, and Chrysler. The only reason GM sold controlling interest in GMAC to them is because GM's junk bond rating would not allow them to get GMAC credit at decent rates. Basically Cerebus is GM's cosigner for GMAC. One important note..Cerebus bought Chrysler after it bought GMAC..so it was not like GM knew they were selling their financing business to what would be a competitor.
A few reading points-
To raise money for reorganization, General Motors divested various assets including GMAC. This divestiture was accelerated at the prompting of investor Kirk Kerkorian and his former representative on GM's board, Jerome York.
On March 23, 2006, General Motors announced that it completed the sale of a 78% interest in GMAC Commercial Holding, its commercial real estate subsidiary, for $1.5 billion in cash to a private investment group including Kohlberg Kravis Roberts & Co., Five Mile Capital Partners and Goldman Sachs Capital Partners. The deal includes the payoff of all intracompany debt owed to GMAC, bringing the total value of the deal to $9 billion. The new entity, in which GMAC owns a 21% interest, is known as Capmark Financial Group, Inc.
On April 3, 2006, GM announced that it would sell 51% of GMAC as a whole to a consortium led by Cerberus Capital Management, raising $14 billion over 3 years. Investors also include Citigroup's private equity arm and Aozora Bank of Japan. The group will pay GM $7.4 billion in cash at closing. GM will retain approximately $20 billion in automobile financing worth an estimated $4 billion over three years. The sale was completed in November 2006.
It was revealed on October 10, 2008 that GM may exchange its remaining 49% stake in GMAC to Cerberus for Chrysler LLC, potentially merging two of Detroit's "Big Three" automakers.[1]
On March 23, 2006, General Motors announced that it completed the sale of a 78% interest in GMAC Commercial Holding, its commercial real estate subsidiary, for $1.5 billion in cash to a private investment group including Kohlberg Kravis Roberts & Co., Five Mile Capital Partners and Goldman Sachs Capital Partners. The deal includes the payoff of all intracompany debt owed to GMAC, bringing the total value of the deal to $9 billion. The new entity, in which GMAC owns a 21% interest, is known as Capmark Financial Group, Inc.
On April 3, 2006, GM announced that it would sell 51% of GMAC as a whole to a consortium led by Cerberus Capital Management, raising $14 billion over 3 years. Investors also include Citigroup's private equity arm and Aozora Bank of Japan. The group will pay GM $7.4 billion in cash at closing. GM will retain approximately $20 billion in automobile financing worth an estimated $4 billion over three years. The sale was completed in November 2006.
It was revealed on October 10, 2008 that GM may exchange its remaining 49% stake in GMAC to Cerberus for Chrysler LLC, potentially merging two of Detroit's "Big Three" automakers.[1]
History-
Founded in 1992, Cerberus (named for the legendary three-headed dog in Greek mythology that guarded the gates of Hades) invests primarily in companies which are near bankruptcy in the hope of making the businesses it acquires profitable. Feinberg has stated to his employees that while the Cerberus name seemed like a good idea at the time, he later regretted naming the company after the mythological dog.[1]
The company has been a very active acquirer of businesses over the past several years and now has sizable investments in automotive, sportswear, paper products, military services, real estate, energy, retail, glassmaking, transportation, and building products. In 2006, its holdings amounted to $24 billion. While many of its peers have bought out companies in order to strip assets and sell on for a profit, Cerberus builds its reputation on identifying firms that are undervalued, and assisting in rejuvenating them by working with current management.[1]
On October 19, 2006, John W. Snow, President George W. Bush's second United States Secretary of the Treasury, was named chairman of Cerberus.
Founded in 1992, Cerberus (named for the legendary three-headed dog in Greek mythology that guarded the gates of Hades) invests primarily in companies which are near bankruptcy in the hope of making the businesses it acquires profitable. Feinberg has stated to his employees that while the Cerberus name seemed like a good idea at the time, he later regretted naming the company after the mythological dog.[1]
The company has been a very active acquirer of businesses over the past several years and now has sizable investments in automotive, sportswear, paper products, military services, real estate, energy, retail, glassmaking, transportation, and building products. In 2006, its holdings amounted to $24 billion. While many of its peers have bought out companies in order to strip assets and sell on for a profit, Cerberus builds its reputation on identifying firms that are undervalued, and assisting in rejuvenating them by working with current management.[1]
On October 19, 2006, John W. Snow, President George W. Bush's second United States Secretary of the Treasury, was named chairman of Cerberus.
So that leaves us wondering...
First off...Cerebus seems to have figured out the the loan business is much better than the car business..and wants to get rid of Chrysler. The problem is...both loan businesses (GMAC and Chrysler Financial) depend on a health GM and Chrysler. Cerebus seems to think the best way for this to happen is with GM and Chrysler to combine, cut the fat, and let Cerebus have a small stake on the board while owning both captive finance comapnies.
Now we all know that Cerebus is using restricted lending by GMAC as a way to bring GM to it's knees. For a while GM (and most dealers) have made more money financing cars that building them. Now the million dollar question is...Since the merger seems to be off, why is Cerebus still using GMAC to strangle GM?
Can anyone make a resonable argument? I mean..they are in a pretty odd position because they own Chrysler, and Chrysler financial...but they also own GMAC who's success is directly tied to the fortunes of a competitor in GM. That means they can't just use GMAC as a tool to outright strangle GM out of business because then it would also take down Chrysler suppliers?
The only reasonable argument I can think is that maybe my making GM's situation more dire, they accelerate government loan money to both Chrysler, and GM which will in turn help their financing business?
Last edited by formula79; 11-18-2008 at 10:48 PM.
11-19-2008, 02:47 AM
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What are the possibilities of GM selling off the other 49% of GMAC and starting over from scratch? At the rate at which Cerberus is seemingly trying to kill GM through GMAC, it would seem worth it to sell of the rest of GMAC and use that money to start over.
Probably now is not the best time with the way the credit situation is. But once that is over, sell it off and start over. Its really the only logical choice, unless GM can come up with the money to buy back the 51% from Cerberus. There's a thought too. JPMorgan is supposedly on Cerberus' back to get their $9 billion or so back from when they bought Chrysler. Sell GMAC back to GM, for a similar amount, payoff JPMorgan, and still get money from the fed for Chrysler while keeping control of Chrysler Financial.
Probably now is not the best time with the way the credit situation is. But once that is over, sell it off and start over. Its really the only logical choice, unless GM can come up with the money to buy back the 51% from Cerberus. There's a thought too. JPMorgan is supposedly on Cerberus' back to get their $9 billion or so back from when they bought Chrysler. Sell GMAC back to GM, for a similar amount, payoff JPMorgan, and still get money from the fed for Chrysler while keeping control of Chrysler Financial.
11-19-2008, 06:46 AM
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With only ~12B left...that's not happening
11-19-2008, 07:42 AM
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those are some interesting thoughts in the original post. It's pretty wild to see the situations that arise when companies are so closely connected to their competitors. Please correct your spelling from Cerebus to Cerberus though... it's spelled correctly in your references but not in the body of your post and the title of the thread.
11-19-2008, 11:15 AM
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Aside from that, it takes a huge amount of capital to run an outfit like GMAC. IIRC, GMAC would typically carry about $200 billion in debt, whereas GM's automotive operations would be about one tenth that. Obviously, GM has no means to raise that kind of capital now or in the foreseeable future.
11-19-2008, 11:41 AM
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Now we all know that Cerebus is using restricted lending by GMAC as a way to bring GM to it's knees. For a while GM (and most dealers) have made more money financing cars that building them. Now the million dollar question is...Since the merger seems to be off, why is Cerebus still using GMAC to strangle GM?
Because, for once, it's the RESPONSIBLE thing to do. Selling expensive vehicles to people who can't afford them is part of the reason we're in this mess to begin with. Want a 30K car and don't make a lot of money??? Keep driving what you have, save up a big down payment, THEN buy it. Or buy something cheap you can drive for a year or two then buy what you want. Unfortunately we live in a "have to have it right now or I'll cry about it" society.
11-19-2008, 11:54 AM
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Cerberus is a capital management firm. They're in it for the money. They bought GMAC when GM was desperate for cash. They bought Chrysler for what they considered a bargain and now they're trying to cash out and cut their losses. They blocked loans through GMAC to force GM to merge with Chrysler and now as that deal fell through, they are saying things are just as bad for Chrysler as GM and Ford. I see it as nothing more than Cerberus wanting to get in line for the free handout. If the US government doesn't help out the US auto industry, I suspect we'll hear at some point that Chrysler isn't as bad as first thought. In other words, they'll put lipstick on the pig and try to off load it to someone else.
11-19-2008, 12:35 PM
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You're making two assumptions that I feel are erroneous:
1) That Cerebus knows what it's doing. They made wheelbarrows of cash at the same time that a lot of other poorly-run companies also make huge profits. Big deal.
2) That Cerebus is artificially restricting GMAC lending just to put the hurt on GM. The fact of the matter is that ResCap (one of GMAC's lending arms) is nearly certain to go into Chapter 11 (and maybe progress quickly into Chapter 7). That alone might be enough to force GMAC into bankruptcy.
Add in the massive amounts of terrible auto loans and leases in GMAC's current portfolio, combine that with the fact that the company can't secure outside financing, and it's likely that the current lending rules are a result of the fact that GMAC is just plain screwed.
1) That Cerebus knows what it's doing. They made wheelbarrows of cash at the same time that a lot of other poorly-run companies also make huge profits. Big deal.
2) That Cerebus is artificially restricting GMAC lending just to put the hurt on GM. The fact of the matter is that ResCap (one of GMAC's lending arms) is nearly certain to go into Chapter 11 (and maybe progress quickly into Chapter 7). That alone might be enough to force GMAC into bankruptcy.
Add in the massive amounts of terrible auto loans and leases in GMAC's current portfolio, combine that with the fact that the company can't secure outside financing, and it's likely that the current lending rules are a result of the fact that GMAC is just plain screwed.
11-19-2008, 02:42 PM
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I'm relieved that the merger didn't happen. Remember your history? The merger of 2 ailing companies does NOT result in the creation of a healthy 1. Look at the merger of Studebaker & Packard! Which 1 observer described, quite eloquently, as 2 drunks trying to help each other to cross a road. A successful merger requires the ailing company to merge with a healthy 1. Business101.
11-19-2008, 05:45 PM
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11-20-2008, 10:03 AM
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cerberus is a hedge fund and consequently invests in situations that it deems it can make money on. I'm not sure all of this is planned. I don't know if they are using GMAC to kill GM or just using GMAC because they have power with it.
They are not really experts in this industry. So they may or may not know what they go themselves into. Buying Chrysler on paper differs from running Chrysler. The same is true if the GM/chrysler merger happened. Its a way for an investment firm like cerberus to make money but if they had to run the company it would blow up on them.
They don't run companies. they buy, sell, invest them.
They are not really experts in this industry. So they may or may not know what they go themselves into. Buying Chrysler on paper differs from running Chrysler. The same is true if the GM/chrysler merger happened. Its a way for an investment firm like cerberus to make money but if they had to run the company it would blow up on them.
They don't run companies. they buy, sell, invest them.
11-20-2008, 10:46 AM
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11-20-2008, 11:06 AM
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I wouldn't put it past them to do stuff that hurts GM's sales in order to drive sales to Chrysler. Hence my question -- if Chrysler Financial hasn't adopted the 700 minimum too, that's pretty strong evidence.