Private Equity.... What is so bad about them??

By Andres D’Alessandro C.

Everywhere I read something about private equity firms it is always something negative. And I don’t really understand why. Yes, private equity firms do tend to cause massive layoffs when they take over a company. But that is only in companies that have way too many employees to begin with. I like to think of private equity as a kind of financial doctor. They come in fix up a company or make it profitable in whatever way be necessary and then sell it. Now I admit, I am being a little naïve, a lot of these private equity firms just borrow massive amounts of money, pay themselves huge dividends, and then sell a worse off company. But sometimes, just sometimes, they really do the right thing. It all depends on how you look at it I guess.

I personally, as you may have noticed, am completely for private equity. I believe to be the purest form of capitalism. They make companies that are not running at their best improve themselves. You see it all around the world, huge corporations shaping up because they are afraid of being taken over. That is a really positive effect they have on companies. I guess, you could say private equity is capitalism’s way of taking out the weakest competitors out there. And in way where every country is obsessed with economic growth and economic growth is dependent on how well companies within that country are doing, than shouldn’t private equity firms be praised and not booed.

But that is just one man’s opinion.

DaimlerChryler sells Chrysler??

By Andres D’Alessandro

On Valentine’s Day this year, the CEO of DamilerChrysler, Dieter Zetsche, said that he would be looking at all possible solutions to the Chrysler problem. In case you don’t know what the problem is, Chrysler lost 1.5 billion dollars last year. This week marks the deadline for offers to buy Chrysler. Taking this into consideration I have decided to examine three possible scenarios, which I think DaimlerChrysler could use.


Scenario 1: Complete Sale of Chrysler
This definitely is the most talked about scenario and although selling Chrysler might be the most logical solution for most people, I would tend disagree with this opinion. Selling Chrysler would make DaimlerChrysler a much smaller company to begin with. Don’t get me wrong, DaimlerChrysler will remain a huge company, but it will be vastly more susceptible to a takeover. Now, you might think, how can that be possible? BMW and VW are both smaller companies and they are not likely takeover candidates. But DaimlerChrysler differs greatly from those two companies. To begin with the Quandt Family, who own over 50% of the equity and voting rights, controls BMW. This gives BMW vast protection from a private equity takeover. VW on the other hand, had the protection of the VW Law, which vastly constrains the voting rights of any one shareholder, no matter how big his share is. That law is about to be taken out of effect, nevertheless the Porsche/Piech Family controls VW with its 31% stake and together with Lower Saxony (German State, which controls another 21%), VW will be effectively protected against a possible takeover.

There is also the issue of pension and medical payments for Chrysler employees, which are yearly in the billions. If Chrysler were actually sold, the most likely scenario is that DaimlerChrysler would probably have to pay the buyer billions over years to help cover those costs. And that would definitely dig into earnings from other areas like Mercedes-Benz.


Scenario 2: Forget Chrysler focus on Jeep and the Minivans
As long as we are talking about selling, why not consider the option of just getting rid of the Chrysler brand all together. Most analysts say that Chrysler is worth more in parts anyways, so why not just concentrate on those parts that have the potential. In Chrysler these parts would definitely have to be the Jeep brand and the Minivans.

Jeep is a huge brand with great consumer recognition all around the world. In fact, in a lot of countries SUVs are simply referred to as jeeps. Ok, Jeep isn’t as synonymous with quality anymore, like it used to be. But it still brings in a profit and its market goes beyond than just the US, this in fact has always been Chrysler’s biggest problem. Another plus is that its product line compliments rather than competes with Mercedes Benz’s product line, which Chrysler sometimes does (Notice the Chrysler Crossfire).

The other big part is the Minivan. Chrysler invented the minivan and it is one of the few things it has continued to do right over the years. The major problem with keeping them would be to decide under what brand to sell them. You could sell them as Chrysler, but it wouldn’t make much sense in having just one model size, now would it. Another option is integrating it into the Mercedes Benz line, but you could be taking the risk of lowering its brand value (because minivans are really considered sexy!). So by just keeping this part, it would actually be more complicated.


Scenario 3: Keep Chrysler and get rid of Smart
All this time we’ve been talking about selling or closing down Chrysler, but why not sell or close down Smart. In case you do not know, Smart is a car brand made by Mercedes Benz, mostly sold in Europe, which sells tiny cars. If you ask me Smart is a much bigger problem than Chrysler. Smart has lost over 8 billion euros in the last 8 years and there appears to be no end in sight to these losses.

Chrysler and Smart’s problem are very different. Chrysler isn’t selling many cars because it is mainly producing gas guzzling cars and trucks in a world with oil prices in the 60s and 70s dollars per barrel. But most people still like Chrysler cars. Smart’s problem, on the other hand, is not fuel efficiency, but just that most people don’t want to buy a car that feels like you could break it if you gained 50 pounds.

Chrysler also has the problem that there has been no grand effort to integrate the two companies. The sharing of technology has been minimal. On the one hand, because the Mercedes people don’t want their brand cheapened and on the other hand, because the Chrysler people don’t want to make the brand more expensive. Both are valid arguments, but they still should be more integration between the companies. Unfortunately, DaimlerChrysler’s former CEO barely applied any pressure to get this done.


Taking all of these scenarios into consideration, the most likely to happen is scenario 1, but scenario 3 makes the most sense both socially and economically in the long term. Are they really going to let this opportunity pass them by??

David buys Goliath

By Andres D'Alessandro

I have to say. I am a little bit amazed. I never thought that company with 7 billion euros in sales a year could possible takeover a company with 105 billion euros in sales a year. But it appears that I made the biggest mistake of all, because that is exactly what is happening. Porsche (the sports car maker and probably the smallest independent car company in the world, that still has some importance in the market) now owns about 31% of Volkswagen AG. Volkswagen is known for the Beetle, Jetta and Passat, and it is also the biggest car company in Europe, as well as fourth in the World.

Now you might think that 31% is not exactly ownership. And you would be correct in thinking. But you see in Germany there is a law called the VW Law. This special law basically states that no shareholder, no matter how much of the company he owns, can have more than 20% of the votes. This was created because the German State of Lower Saxony is the second major stockholder in VW and to protect the company from takeovers. This law also states that should a company accumulate 30% of the shares in VW, he must therefore make a tender offer for the remaining 70%. Which is precisely what Porsche has done. Of course they offered a lowball offer of just over €100 a share. Which no one will take, give that the current share price is €115 and rising.

Now you might ask yourself. Why would Porsche, the most profitable car company in the world (yes, even more profitable than Toyota), would want to buy a company that has been losing billions for years. (It actually did turn a profit last year). Well, this is where my explanation divides itself. I am going to try to explain to my best understanding

Reason 1
VW is Porsche’s biggest business partner and in order to insure the future of this highly lucrative business relationship Porsche has become the major stockholder in VW. There is some truth in this argument. I mean, they are currently working on a hybrid engine. But then again Porsche is also working with Toyota on this. So that argument is rather weak. They also developed the framework for the Cayenne, Touraeg and Q7 together, so that works well. This is what they said. I think they are just beating around the bush. See Porsche is a growing company and in the not-so-faraway future, they are going to have capacity shortages and VW has a lot of overcapacity… So that is very complimentary. But I think goes deeper than that. When you think about it, in global term Porsche is a very small company. And it is standing there all alone. Not like Ferrari, which is part of FIAT, or Lamborghini, which is part of VW. The cost of developing new technologies and new cars is becoming increasingly high and it will come to a point where Porsche just cant do it alone anymore. I mean how big can it actually get….. It already made €1.1 billion on a little over €7 billion in sales last year. That is a huge profit margin for a car company. So in that sense, in buying company like VW, it is actually taking out an insurance policy on its future. So that it can remain “independent”.

Reason 2
This is my favourite reason. Porsche is owned by the Porsche/Piech Family. They hold about 50% of the equity and all of the voting rights. The Chairman of the Supervisory Board of VW is Dr. Ferdinand Piech, which just so happens to be the second largest individual shareholder of Porsche holding 12.9%. Isn’t that an amazing coincidence???!?!?! Oh wait, but there's more. You see Porsche was started by Dr. Piech’s grandfather, the ever so famous Dr. Ferdinand Porsche. And in a certain way, Dr. Porsche was the founder of VW, I mean, he designed the first VW, the Beetle. Funny how things kind of turn out……. Still not quite done yet, you see the Porsche/Piech Family owns two companies called Porsche. One is the Porsche, AG, which produces those wonderful sports cars, and Porsche Holding, GmbH, which operates Europe’s largest network of car dealerships. Now which car brand do you think it might represents????? I’ll give you a hint, it ain’t Porsche….. No no no, they sell VW. You see they are VW’s largest distributor in the whole world.


So I would like to leave you with a question. How funny would it be, if one of the largest car companies in the world was a family owned/controlled company? And this would be one tough competitor. If they managed to do with VW what they have done with Porsche, we could easily be seeing a real competitor for Toyota.

Comment and replies are welcomed and appreciated.