Cerberus's Sharp-Toothed Ways
Tuesday, May 15, 2007
In more than a decade of buying into down-and-out companies across three continents, Cerberus Capital Management has applied a similar strategy to most of its targets: cut, cut and cut some more.
Now Chrysler is set to join a list of acquisitions that includes long-haul trucker Fruehauf, Air Canada and lingerie maker Frederick's of Hollywood. Many of those companies have experienced turnarounds under Cerberus's slashing ways, but not without pain.
New York's Cerberus bought more than 600 struggling Albertsons supermarkets last year and laid off nearly 1,000 workers within months. Last fall, the firm bought the on-the-brink Blue Bird school bus manufacturer; earlier this month, Cerberus closed its Canadian bus plant and let go 130 workers. Cerberus bought a North Carolina textile company out of bankruptcy in 2004 and closed two mills within the year. It bought the Alamo and National car rental chains out of bankruptcy in 2004 and moved them from high-rent South Florida to more-affordable Tulsa.
Cerberus's sharp-toothed ways may be inspired by its namesake: Cerberus was the three-headed canine guardian of the gates of Hades in Greek mythology.
Cerberus the company maintains an even lower profile than its rivals, such as Providence Equity Partners, Blackstone Group and Washington's Carlyle Group. Cerberus has $25 billion under management and in funds and accounts. With just 200 of its own employees, Cerberus owns or has pieces of about 50 companies with more than 175,000 employees and a combined annual revenue of $60 billion, the company says.
The firm is run by financier Stephen Feinberg, who was a trader at Drexel Burnham Lambert in the 1980s, when the firm popularized the use of "junk bonds" for corporate takeovers. Former Treasury secretary John W. Snow was named chairman of Cerberus in October. Former vice president Dan Quayle is on the board.
Cerberus distinguishes itself from other private-equity firms by maintaining a staff of in-house operations executives. Meaning: When it takes over a company, it often doesn't have to recruit a new chief executive; it puts one of its own in place.
"This is a bit of an unusual transaction for them in that it does now make them very, very public," said Boston University law professor Charles Whitehead, who studies equity firms. "It's like the Japanese buying Pebble Beach -- if you want to get attention, this is the way to do it."
These are flush times for Cerberus and all of private equity. Moneyed investors seeking big payoffs have created an equity pool estimated at $500 billion, up from $8 billion at the beginning of the 1990s, according to the Columbia Business School.
Nearly $400 billion in private-equity transactions have taken place so far this year, nearly doubling the dollar amount by this point last year, Thomson Financial reported.
Investors are attracted to the high returns generated by equity funds. Among Cerberus's investors is the California State Teachers' Retirement System.
Generally, equity money seeks struggling industries where cuts can be made and profits quickly increased. Some firms seek to flip their companies soon after paring them to the bone. Others have a longer-term view, taking their annual guaranteed profit and helping turn around ailing companies.