How Private Equity Could Save Chrysler

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Kirk Kerkorian desperately wants to buy an automaker. Five months after the 89-year-old deal maker sold a large stake in General Motors–after failing to pull off some major reforms he had sought–Kerkorian has offered $4.5 billion for the Chrysler Group, which parent company DaimlerChrysler has put on the block. If Kerkorian–or another private buyer–ends up owning Chrysler, it might be the best chance for turning around the No. 3 U.S. automaker. It could even revive Detroit.

What can a private buyer do that DaimlerChrysler can't? Plenty. Private investors scout for companies that are struggling under the ordinary rigors of public ownership. Public shareholders apply accountability to a company, but they can also distort sound business practice by forcing management to keep the stock price high today–often at the expense of strategic, long-term priorities. Chrysler, parent of the Dodge, Jeep, and Chrysler brands, is a good example of a company that is putting off tough but necessary measures, because they would cause too much pain today.

You can tell just by walking into a showroom. Dodge is giving away $5,000 to anybody who buys a Ram pickup. There are other huge incentives on the Chrysler Town and Country minivan, the Jeep Commander SUV, and several other Chrysler vehicles. When you're deeply discounting brand-new merchandise, something's wrong with your business plan.

In Chrysler's case, the logic is simple: Chrysler needs to discount its vehicles because it builds too many of them. The company overproduces because it has too many plants and too many workers. There are probably too many dealers as well, who insist on too many models to fill showroom floors, effectively competing with one another and driving prices down even more. The company's whole structure is bloated because it has been committed to outdated labor contracts, old factories, and dealer arrangements that are no longer efficient–just like Ford and General Motors.

All three Detroit automakers are getting smaller–but not fast enough. That's one big reason that Chrysler lost $1.5 billion last year and that Daimler shareholders want to get rid of the American division. In addition to Kerkorian, other possible buyers include two private-equity firms, Cerberus Capital and the Blackstone Group. A fair price is probably somewhere between $5 billion and $10 billion.

Private-equity firms are often considered the vultures of capitalism, because of their reputation for financing the purchase of a company by taking on debt, selling off prized assets to pay it down, and consolidating the rest into a rump company. That could happen with Chrysler. The Jeep brand is strong, for example, with room to grow overseas and could probably be sold for a nice piece of change.

But private owners might also be able to run Chrysler–in its entirety–better and more efficiently than current management. Private buyers aren't subject to the whims of Wall Street (until they "exit" their investment via an initial public offering) and wouldn't have to worry about stock price. They'd also have much more leverage over unions and dealers than Chrysler does now, which might allow them to pull off some dramatic moves that so far have eluded all of the Detroit Three.

Domestic automakers have announced plant closings and layoffs, but the changes have been incremental compared with the shock therapy they probably need. That's because the companies don't want warfare with the unions, which could lead to strikes, sinking stock prices, and ghastly losses. Private owners wouldn't want to lose money either–but they could ride out a strike without having to answer to shareholders and clean house, if it came to that, once a strike was over.

For the same reason, private owners would be in a better position to insist on cuts in costly benefits that are bleeding Chrysler (along with Ford and GM), adding thousands of dollars to the average cost of building a car.

Dealers might have to swallow some tough medicine, too. Car makers need to maintain cozy relationships with dealers, who, after all, are the ones who interact with customers. But that can leave more tough decisions unmade. Does there need to be a Dodge version of every Jeep and Chrysler vehicle? Does Chrysler even need Dodge at all? If you're a Dodge dealer, hell, yes–you can't make money without a franchise or fresh products. But too many brands or products dilute the company's image, lower values, and force you to sell some of your goods at fire-sale prices. And huge incentives like the $5,000 giveaway on the Ram usually come out of the manufacturer's pocket–not the dealer's.

Chrysler's cross-town competitors have the same problem. If you were building those companies from the ground up, would you establish a Mercury division with products just like the Ford brand? Or try to rationalize how Chevrolet, Pontiac, Buick, Saturn, and Cadillac, all GM divisions with lots of copycat vehicles among them, have distinctive, separate identities? No way. You'd set up two divisions, three at the most, the way Toyota has Lexus and Scion.

Paring back or killing weak brands is sometimes necessary–except that in the auto industry, it can cost more to buy out dealers than you might save by rationalizing your product line. Private owners, backed by the threat of breaking up or liquidating the company, would once again be in a better position to make tough yet rational business decisions, and kill underperforming brands if that's what it takes.

Detroit has been through a lot of pain already, and there is more to come before any of the three domestic automakers gets healthy and starts making money again. It could be drawn out and agonizing, which is the path the automakers are on now. Or there could be battlefield surgery, which would spill a lot of blood quickly. But it might also get the patient back up on its feet in fighting shape.

If Kerkorian or another private firm buys Chrysler, look for rapid, aggressive moves to turn an ailing domestic automaker into a lean global competitor. If shock therapy works at Chrysler, then GM and Ford will have to follow–or fade faster and further. Kerkorian, who turns 90 soon, may be just the guy to put the pedal to the metal.

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--Rick Newman

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  • Rick Newman

    Rick Newman is the author of Rebounders: How Winners Pivot From Setback to Success and the co-author of two other books. Follow him on Twitter or e-mail him at

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