Thinking about Cerberus

Cerberus, the private equity group, bought Chrysler from Daimler in 2007.

I've been thinking of that deal anew in recent weeks with the continued disintegration of the US auto industry.

Here's a fascinating blog entry written by someone else who has obviously also been giving it some thought Robert Farago.

Farago's unnamed source says that he thinks Cerberus was really hoping to merge Chrysler's finance company with GMAC, thereby creating a massive auto lender which it could sell to a big bank. Given that plan, the Cerbereans had to keep the auto company alive in order to preserve the real prize, that finance company.

There is some plausibility to that, and I'm beginning to understand the flaw in some of my own earlier theorizing about the future of the auto industry. I've been focusing on the auto/petroleum connection, or lack thereof. I've long thought it would be natural for Exxon/Mobil to buy an auto company, for the same reason that hot dogs and relish are generally sold by the same vendor. Exxon/Mobil could afford the losses at the showroom, just as Gillette sells its razors for a loss -- it does so because it makes a profit from the stream of blades that the customer who buys the cheap razor is thereafter committed to buy.

I now see that neither analogy really works. The hot-dogs-and-relish combo is only natural because at appropriate events we want to buy them at the same time. We want the hot dog, and just enough of a condiment to go with the dog. But of course if we're buying condiments for use at home, we'll go to a grocery store not a ballpark, and there is no great tendency toward consolidation of the relish and hot dog companies who supply such stores.

The lose-on-razors-to-profit-on-blades trick only works for Gillette because its blades are specially designed to fit its razors. So do those of Schick. Were blades fungible (as if petroleum) that model would break down.

Autos and auto finance is a natural combination for the same reason that hot dogs and relish are. The need is simultaneous. The car dealership is the ball park. I want to get the loan to spread over my new car.

What Farago is suggesting, though, is that Cerberus was banking on a decoupling of auto companies with finance comapnies. A GMAC/ChryslerFin combination would presumably be a company interested in financing anybody's car.

That doesn't seem to have worked out all that well for them.

So what lesson might I draw here? Perhaps that though the times through which we are passing are difficult, they aren't revolutionary. What has been bundled will stay bundled (cars and their finance companies, blades and their razors) and what has been separate (car and petroleum companies) will remain asunder.