Chrysler deal drives the news

The big news in private equity last week was DaimlerChrysler’s agreement to sell an 80.1% stake in Chrysler to private equity firm Cerberus for about $7.8 billion. The deal has garnered plenty of media attention thanks in large measure to the iconic nature of Chrysler and the U.S. automotive industry.

Indeed, a search on Google showed that more than 4,800 stories were posted online that mentioned the words “Chrysler” and “Cerberus.” Plus, Thomson Financial Editor-at-Large Dan Primack said that he spent an ungodly portion of his time last week discussing the “Chryslerus” deal with various reporters, some of whom didn’t know anything about PE. Primack also spent an hour on National Public Radio one night, analyzing the deal with Harvard Business School professor Josh Lerner and former U.S. Labor Secretary Robert Reich.

Former Chrysler Chairman Lee Iacocca also chimed in, with a column on in which he points out that in Greek mythology, Cerberus is a three-headed dog guarding the gates of Hades. Iacocca also addresses the nature of PE firms to “strip and flip,” which is to buy an ailing company on the cheap, slash costs and jobs and then resell for a profit.

“It would be naive to think that cost-cutting and even downsizing are not necessary when a company is struggling,” Iacocca wrote.

Of note in this era of club deals is that the transaction involves a single sponsor buying a troubled industrial company, with most of its investment going toward working capital. DaimlerChrysler only will receive $1.3 billion in capital from the deal, with the remainder coming in the form of working capital that Cerberus would pump into Chrysler. Daimler bought Chrysler in 1998 for around $35 billion.