NEW YORK - Cerberus Capital Management's planned takeover of Chrysler Group marks a power shift on Wall Street as private equity firms transform not only their image, but how - and why - big deals get done.
By making bigger and more compex deals, buyout shops are thinking more like Wall Street investment banks, broadening their strategy from the days when they were known for buying up companies, slashing costs and then putting them back on the market.
With Chrysler, Cerberus is talking about rejuvenating an ailing brand, not about its exit strategy.
"Private equity must now become real about the business of running businesses," said Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business. "The days of buy, strip, and sell are numbered."
In the past, these financial firms gravitated toward well-known names like Hertz, Sealy, Toys 'R Us, and Neiman Marcus - large companies, but not of the size and scope that we're seeing these days.
The deals announced so far this year include some massive pricetags: Kohlberg Kravis Roberts & Co. and Texas Pacific Group are paying $43 billion for energy provider TXU Corp. Other deals include the $27.9 billion KKR-led takeover of credit card processor First Data Corp., and the $25.6 billion acquisition of student lending company SLM Corp. by private-equity firm J.C. Flowers & Co. and three other investors.
And, this past week, Warburg Pincus agreed to pay $3.7 billion for Bausch & Lomb Inc.
John Snow, the former Treasury Secretary who is now Cerberus' chairman, has made it clear the firm wants to revive the Chrysler brand. Cerberus is paying Daimler-Chrysler $7.4 billion for a controlling stake in the U.S. automaker, and is arranging $62 billion more in financing for its overhaul.
It also fits into Cerberus' overall strategy in the auto industry, where it controls a number of companies. The firm already owns a 51 percent stake in GMAC Financial Services, among other investments. It is also the midst of a $1 billion takeover of parts supplier Tower Automotive Inc. and has been in talks to buy a controlling interest in bankrupt another parts supplier, Delphi Corp.
That is an important shift, analysts said. Before, it was common for private equity firms to manage a portfolio of completely diverse companies. Now, many are forming their portfolio of companies around specific sectors with a goal to become true industry players.
"We don't buy with the intention to pursue an exit," Snow told The Associated Press in an interview. "We buy with the intention, with the clear intention, to help turn the company around, help it achieve its potential."
That's different from the slash-and-burn tactics private equity firms have used in the past. Even Cerberus has been reproached for its handling of a few deals.
Cerberus bought Vanguard Car Rental, which operates the Alamo and National Brands, out of bankruptcy in 2003, and was criticized for swiftly moving the corporate headquarters and cutting hundreds of jobs. It wasn't long after the 2004 acquisition of Mervyn's department store that Cerberus shuttered 80 locations and exited two major markets.
Another factor that private equity faces is that Wall Street has become wary when buyout shops bring some of their companies public. The number of IPOs have surged to levels not seen since the tech boom in 2000, which means investors can be more selective about what they buy into.
In 2006, private equity firms cashed in about $33 billion from IPOs - up 25 percent from the previous year, according to Dealogic. This year alone they've made $7.39 billion from 28 IPOs, which have included names like National CineMedia Inc. and MetroPCS Communications Inc.
But, not all have done well. Movie theater owner Cinemark Holdings Inc., taken private by the company's management and Madison Dearborn in 2004, went public last month with lackluster results. The company's offering price was $19, and it closed on Friday at the same amount.
"There's so many big deals in the market that people are just going to be much more cautious, and private equity firms have to play to that," Morici said. "Investors aren't going to buy into just anything, and the entire private equity industry is adapting."