Cerburus: Does the "Forever" Trade Hold?

We agree with Cerberus Partner, Tim Price, saying ``Auto sales aren't going down every year forever.'' But we have one question? Does the Cerberus Private Equity model have "forever" modeled into the risk management parameters of their investment?

This is classic duration mismatch, and it certainly is not a unique problem to Cerberus. They're actually on the short list of funds whose process we respect, but they brought on a CEO who didn't do macro at Home Depot, and he certainly doesn't do it for Chrysler.

Today, Bloomberg featured a grim recap of Nardelli's reign as CEO of Chrysler and it makes for compelling reading.

Presented as a timeline reaching from the decision by Cerberus partners to install the former Home Depot leader to save the firm last August with much fanfare to the ugly reality of the present.

With the company on track to lose $1.6 Billion in 2008, Nardelli is betting that a complete overhaul of the product line will revive the brand. Among his initiatives is a new Dodge Ram set to go on sale in September. With satellite TV, a car like ride, an bin in the cargo box for hauling 10 cases of beer, the new truck gets only 15 mpg in the city and has a sticker price with options of greater than $40,000.

With every other major Manufacturer abandoning the gas guzzling SUV's and trucks (and closing the facilities that manufacture them) to embrace fuel efficient models and hybrids Nardelli's new Ram initiative is, to say the least, contrarian.
  • John Casesa -``With the company using this much cash and with high gas prices, Chrysler has months, not years, to establish alliances to get products it doesn't have''. Casea predicts Chrysler is unlikely to survive as a free-standing car company.
  • Kimberly Rodriguez, Grant Thorton - predicts Nardelli and Feinberg will try to pilot Chrysler as a smaller company or sell it whole or piecemeal in the next two years. ``They're just trying to get through month to month without writing a big check.''
  • Keith Bachman, Aberdeen Asset -Cerberus's stake in Chrysler is worthless unless Nardelli can pull off a turnaround. ``I consider Cerberus's equity an out-of-the-money call option that may or may not achieve value.''
  • John Murphy, Merrill Lynch ``Chrysler's product pipeline severely lags the industry,...this is an active decision by new owners to rationalize the product portfolio in advance of a breakup or sale.''
  • John Gunning, Manassas Dodge - ``You can't, in six months, or a year, or 18 months, change the product line,'' Gunning says. ``Until we come to grips with that, we are not going to be a viable company.''
  • Jerome York, Kerkorian advisor -``The long-term history of these alliances, in many cases, is not good'' -referring to JV with Chery, Volkswagen & Nissan.
  • Consumer reports -For 2008, only 2 of 21 Chrysler vehicles are among recommended models, compares with 17 of 21 for Toyota and 5 of 8 for Hyundai.

The Bloomberg article contains painfully blunt assessments of Nardelli and the company's prospects from industry observers: