As Chrysler Group is snapped up by a private equity firm, the Detroit automaker is headed for big changes and it will not be "business as usual" for the company.
"In a couple of months, it will go private and we can run it the way we want to run it and and not worry about quarterly numbers or what somebody might think," Chrysler CEO Tom Lasorda said.
The private equity firm Cerberus Capital Management will purchase Chrysler Group for $7.4 billion, with the company joining Toys 'r' Us, Univision television, HCA hospitals, Harrah's casinos, Clear Channel Radio and Albertson's supermarkets as those purchased by private firms.
The deep pockets of private equity firms have announced $355 billion worth of buyouts this year, twice the value of those purchased in 2006.
"They've raised a huge amount of money and they've gone elephant hunting," said Colin Blaydon, of Dartmouth's Tuck School of Business.
Straight Line to Profitability
Regardless of the company purchased, the goal is the same with each buyout — to make a buck on the deal.
Private equity firms are notorious for using hardball tactics to earn profits, and with no shareholders, it's easier to make tough decisions, away from the limelight, which is unavoidable for public companies.
Cerberus, named after the mythological three-headed dog that guards the gates to hell, is likely to be no exception with its purchase of Chrysler as it begins to lay out a strategy for profitability.
"They're going to walk in and lay down Chapter 11 as the worst case [scenario] and no one is going to want it," said Jim Schrager of the University of Chicago Business School. "And they are then going to offer something to the unions that is better than Chapter 11, but much different than the current situation."
Chrysler's 80,000 workers and 111,000 retirees could face a choice between bankruptcy for the company and the possibility of losing jobs and pensions altogether, or making significant concessions now on health care benefits that add an estimated $1,400 to the cost of every vehicle Chrysler makes.
"Private equity firms are pure capitalism. They take investors' money and figure out a way to make a return on it. No games in between," Shrager said. "It is a straight line from A to B."
How well Chrysler walks that line is sure to be noticed, perhaps by other private equity firms with visions of elephant hunting elsewhere in Detroit.