The deal that gives control of auto giant Chrysler Group to private equity firm Cerberus Capital Management may be a defining moment for the new "masters of the universe" -- the buyout chieftains who are sweeping large chunks of corporate America into their portfolios.
How Cerberus handles Chrysler also could shape, or reshape, the public image of buyout firms at a time when their growing power has raised concerns about their long-term effect on the health of the U.S. economy.
FOR THE RECORD
Private equity: An article in Business on Tuesday about private equity investors misspelled the last name of a Massachusetts Institute of Technology professor. She is Antoinette Schoar, not Shoar.
Chrysler "is such an icon, it's going to be the clearest test yet" of the idea that private equity buyers know best how to focus companies for long-term success, said Colin Blaydon, director of Center for Private Equity and Entrepreneurship at Dartmouth College.
By shelling out $7.4 billion for an 80.1% stake in Chrysler, Cerberus Chief Executive Stephen Feinberg and his team are betting that they have the answers that Germany's Daimler couldn't find in nine years of trying.
When "the solution is private equity" for a global brand such as Chrysler, "that's a powerful statement on how big a part of the financing and [acquisition] landscape private equity has become," said Mario Giannini, chief executive of Hamilton Lane, which helps institutional clients pick private equity investments.
The deal for Chrysler is the latest in a wave of takeovers by private equity firms in recent years. Flush with cash from investors such as pension funds and wealthy individuals, and using borrowed money on top of that, private equity firms worldwide have announced buyouts worth $355 billion this year, up from $163 billion in the same period of 2006, according to Dealogic.
The goal is to buy companies that aren't living up to their full potential, transform them into better businesses in a matter of a few years and then sell them or take them public again at a handsome profit.
The struggling auto industry has become a natural target for private equity investors because of the potential for a hefty longer-term payoff -- if the buyers can rejuvenate the companies.
That makes Detroit a high-stakes experiment for these investors.
Josh Lerner, a professor of investment banking at Harvard University, said that although Cerberus faced major hurdles with Chrysler -- particularly with the high cost of its labor force compared with Asian rivals -- "you also can say this is a classic private equity situation."
