Understanding a private-equity beast

By WARREN BROWN

WASHINGTON POST

Cerberus Capital Management, founded in 1992, is one of the biggest private-equity firms in the United States.

Private-equity companies are both the guardians against and the conduits to corporate oblivion.

It is the nature of their being.

They routinely invest in troubled companies, often those languishing outside of the gates of bankruptcy or otherwise positioned on the brink of descent into financial hell.

Typically, private-equity firms take over such companies, strip out the parts that are not working or that are likely to fail, rehabilitate the potentially profitable parts and sell them to the highest bidders.

How they make money

In that way, private-equity firms make money and function as conduits to oblivion. The company that existed before acquisition no longer exists. But at least its demise wasn’t a total financial loss.

Cerberus shares the same corporate genes as other private-equity firms. By nature, it is inclined to buy, strip, fix and sell at a profit. But like a child ashamed of its heritage, Cerberus likes to see itself, and portray itself, as different — the equivalent of a rescue service for runaway or abused companies in mortal danger.

But the truth is in the name Cerberus chose for itself. In Greek mythology, Cerberus is the name of the forbidding three-headed dog guarding the gates of Hades. It can keep you from entering or, should you prove unworthy of salvation, it can prevent you from getting out once you are beyond the gates.

I write these things as a tutorial for those people who have expressed shock and disgust over recent actions taken by Cerberus in the treatment of one of its largest acquisitions, Chrysler.

Shortly after working out an agreement in which the United Auto Workers union made major wage and benefits concessions to Chrysler, Cerberus began shredding product lines, assembly plant shifts, and hourly and salaried employment rolls.

Vehicles that weren’t selling well were cut. Gone were the Dodge Magnum wagon, PT Cruiser convertible, Chrysler Pacifica and Chrysler Crossfire roadster. Plant shifts in Belvidere, Ill.; Toledo, Ohio; Detroit and Sterling Heights, Mich.; and Brampton, Ontario, were cut. An estimated 12,000 jobs were lost with those product and shift cuts.

From the ranks of the UAW in the United States and the Canadian Auto Workers in Canada, and from the word processing machines of liberal and conservative pundits across America, came a hue and cry.

Cerberus was accused of betrayal, of suckering the UAW into a giveback contract. Cerberus was accused of going back on its word to restore Chrysler as an American industrial icon.

It was nonsense. I mean, exactly what did anyone expect? Did they not consider the nature of the beast?

It’s about what sells

Private-equity investment companies are in business to make money, not to give it away. More than most businesses, they are attuned to a basic concept: Consumers determine what sells. What sells makes money. What does not sell drains profits. Thus, slow-selling products and anyone and anything connected with them must go.

It is simple, brutal. It is mean. It is capitalism at its rawest. It respects neither national flags nor corporate legacies nor union solidarity songs nor personal feelings. You either sell at a profit or you perish.

Union members and those of gentle, more compassionate hearts might not understand that. But a three-headed dog guarding the gates of Hell understands perfectly.

Cerberus is a three-headed dog. Pet it at your own risk. It’s nobody’s best friend.