Savior of Detroit scorned in Tel Aviv
Lee Iacocca, the legendary leader of Chrysler, gushed that the fund has an excellent record. Ron Gettelfinger, leader of the Auto Union, threw his support behind the deal in which the fund bought the controlling stake in Chrysler.
BusinessWeek went well beyond these superlatives and headily predicted that the fund's takeover of the troubled carmaker could bring true change in the industry's structure, saving the city of Detroit.
If you'd predicted a few years ago that some nameless, secretive privately held fund would buy one of the three biggest carmakers in the United States, with the ardent support of everybody at said carmaker, you'd have been carted off in a straitjacket.
Said fund is Cerberus Capital Management, the American investments vehicle that took the entire car industry by shock when it bit down and swallowed up Chrysler, buying it from Germany's Daimler in a gigantic, swift deal.
Two Hollywood blockbusters and one best-selling book etched into the collective American mind the concept of private funds - leveraged, hedge funds and private equity - as bloodthirsty sharks that eat companies for breakfast, spit out their workers and then gorge on the proceeds of their liquidation for dessert.
In 1987, the fictitious investment banker Gordon Gekko explained in the movie "Wall Street" why greed would save America, and how value can be created from mass layoffs. Three years later, in "Pretty Woman", the audience learned how to liquidate companies.
This is a gecko.
That same year, "Barbarians at the Gate" described the KKR fund's takeover of RJR Nabisco, exposing the terrific power struggles between leveraged buyers who had locked their sights onto a weakened target.
Giving the devil his due
Five years later, the funds' image has changed. They have become a central financing tool in the capital markets, a legitimate investment target for most of the major pension funds. They have become major players in owning, controlling and managing hundreds of companies, some of them among the biggest in the world.
Cerberus' acquisition of Chrysler legitimizes the whole sector of investment funds. For the first time in the history of the auto industry, one of the giants is passing onto the hands of a financial player, not a company from the sector.
Just as interesting is the dimensions of despair on the side of the seller, Daimler. It paid a stunning $38 billion for Chrysler nine years ago, in 1998. Cerberus did say it will be investing $17 billion in its new toy, but Daimler won't see a cent of that: all will be flowing into Chrysler to strengthen its equity structure and help it meet its towering pension liabilities to workers.
The really surprising part is how the unions reacted. They should theoretically be manning the barricades to block the transfer of a company with 83,000 workers to the possession of a pure-finance player, whose managers are measured by the sole criterion of the returns they achieve.
Evidently the unions of the U.S. of A. are more sophisticated than they're perceived as being. They seem to have grasped that a fixation on returns is not necessarily a bad thing for the workers, and that sometimes, they're the only ones who can rescue the workers' jobs.
The Chrysler transaction is infinitely more complex than the acquisition of Israel's Bank Leumi (TASE: LUMI). But where the fund has managed to snap up dozens of corporate giants and financial institutions the world wide, it failed at its attempt to buy the controlling interest in Israel's second-biggest bank.
The Finance Ministry and Bank of Israel blame Cerberus' management, arguing that it behaved arrogantly and didn't deign to comply with the terms of the tender.
These claims don't fit with Cerberus' record over the years, though.
It is a giant missed opportunity. Never before had Israel attracted a really huge player into its banking sector. In other sectors, we do have giant foreign investors that made giant contributions, too. But the banks remained the province of the local oligarchy and a handful of rich foreign Jews.
As the state reopens the tender for Bank Leumi, up pops the tired old list of contenders: Nochi, Tshuva, Eliyahu and Ofer, each dragging a wagon-load of conflicted and cross-interests.
When refusing to give Cerberus more time to obtain the regulatory permits it needs, the treasury explained that letting the U.S. fund change would have been unfair to the other contestants. Not fair play, you know.
That is a good, worthy reason, especially given the state's bent for bending the rules in favor of certain players.
But now that the tender is reopening, the Finance Ministry and Bank of Israel should make a real effort to usher Cerberus, or somebody else like Cerberus, into Israeli banking. Our oligarchs have enough power. Let them spend their energies on investment abroad.