The Chrysler deal: Why it might work

By U.S. News & World Report

It's a bellwether deal to be sure, with dramatic implications for America's long-ailing auto makers. But Cerberus Capital Management's purchase of the Chrysler Group for $7.4 billion is even more totemic than that.

The deal marks the confluence of several global trends that have been transformational in themselves, and now one huge deal entails most of the buzzwords executives have been lobbing around for the past five years: Private equity is exploiting globalization to gamble on a legacy company that has become uncompetitive. There are also cars involved somewhere along the way, but that's beside the point.

Here's what the deal really signals:

Private equity isn't becoming mainstream -– it is mainstream. One surprising aspect of the Chrysler deal is that the United Auto Workers and their president, Ron Gettelfinger, support it.

A few years ago, it would have been hard to imagine the auto workers backing a buyout by a bunch of finance guys from New York. But as private-equity firms like Cerberus, KKR, the Blackstone Group and others have grown, they've evolved from breakup artists, interested in slicing companies apart and selling the crown jewels, into more strategic investors who actually fix troubled companies.

Gettelfinger gets that -– and probably realizes that owners unfettered by stock-price concerns may have the best shot at fixing Chrysler's long-term problems, such as gargantuan pension and health-care obligations. It doesn't hurt that Cerberus' chairman is John Snow, who served as treasury secretary for 3½ years in the current administration. Before that, Snow earned his keep running the transportation company CSX Corp. (CSX, news, msgs), a mainstream business with real assets. His involvement signals that Cerberus is interested in more than "financial engineering." It might even want to turn Chrysler into a competitive auto maker.

Globalization moves much faster than big companies. OK, so Daimler-Benz's original vision of a global automotive behemoth didn't pan out. But that's not because globalization is a fiction; it's because Daimler couldn't see far enough into the future. The German auto maker was going after scale and synergy, which are rational targets in most businesses. But that wasn't enough.

Today, globalization means you have to build products where you sell them –- and sell them everywhere. Both the Daimler and Chrysler brands have fallen behind competitors, like BMW and General Motors (GM, news, msgs), which have moved aggressively into China, for instance. Chrysler's recent deal to import cars built by the Chinese auto maker Chery has barely been mentioned, but that could be one strategic opportunity that appeals to the Cerberus investors.

There's still muscle in Motor City. The Detroit Three, Chrysler, GM and Ford Motor (F, news, msgs), have repeatedly been written off on account of bloated infrastructure, tone-deaf products and crushing "legacy costs." Despite sinking market share, however, there's probably more automotive talent in Detroit than any other place in the world (except, perhaps, Toyota City, Japan).

The Detroit Three have strong dealer networks and brands that still resonate. That's why billionaire investor Kirk Kerkorian spent nine months trying to gain a controlling interest in General Motors and was interested in Chrysler. The problem has been woefully inefficient use of that talent, white- and blue-collar both. If private investors think they can unlock value at Chrysler, there's probably also untapped value at GM and Ford.

It's not about cars. Auto executives like to say that product is everything. It's not. The Chrysler brand was reinvigorated under Daimler's stewardship, with hits like the 300C sedan, the Dodge Charger, the PT Cruiser and even, most improbably, a V-8 engine, the Hemi. Those weren't enough to keep Chrysler out of trouble, though.

What's been missing is imagination. Like its crosstown rivals, Chrysler has underestimated the impact of environmentalism, even though its corporate bosses came from Germany, a much greener place than the United States.

Chrysler has marched in lockstep with Ford and GM in opposing a toughening of fuel-economy standards, while Toyota Motor (TM, news, msgs)and Honda Motor (HMC, news, msgs) have been earning multiples in return on their investment in a green image. It will be interesting to see whether private-equity bosses can gauge consumer interests better than insular Detroit executives.

Global alliances are hardly dead. One of the top deal makers at Cerberus is Wolfgang Bernhard, who was Chrysler's chief financial officer for a while, before returning to parent firm DaimlerChrysler (DCX, news, msgs) in Germany. Then he left to be one of the top executives at Volkswagen (VLKAY, news, msgs).

Another Cerberus heavyweight is Dave Thursfield, a Brit who ran Ford's European operations, then held a top-level post at Ford headquarters in Dearborn, Mich. While Chrysler's megamarriage to Daimler is over, well-connected global execs like Bernhard and Thursfield will probably help expand Chrysler's worldwide reach, especially with suppliers in China, India, Latin America and elsewhere. There's really no choice. Consigning your business to a handful of stable, familiar markets is the kiss of death for big companies these days. If anything, Chrysler needs to get more global. It just needs the right partners.

This article was reported and written by Rick Newman for U.S. News & World Report.