Note to private equity: Don't mess with Bo

GM's Bo Andersson: "Clearly, we are in a phase where restructuring is needed. (Private equity) brings capital, and they have high expectations of management."

Robert Sherefkin | Automotive News / March 19, 2007 - 1:00 amDETROIT -- Blackstone, Cerberus - meet General Motors purchasing chief Bo Andersson.

He has a message for you and other private equity firms bent on consolidating auto parts makers in hopes of getting better pricing from him.

"I wish them luck," Andersson told Automotive News last week, adding, "It will take more than luck."

Led by Blackstone Group and Cerberus Capital Management, private equity is targeting its largest deal yet in the auto industry: the Chrysler group.

But private equity players already have emerged as the financial backbone of the North American auto supply chain. Automotive News has identified $54.35 billion in annual supplier revenue that in the past year has been acquired, at least tentatively, by private equity firms.

Big money, big clout

Andersson has had a front-row seat in the private equity sweepstakes.

A decade ago the Detroit 3 purchasing chiefs oversaw buyers such as Lear Corp., Dana Corp. and others that routinely sought automaker approval before buying up rivals.

But today, financial players are multibillion-dollar institutions that play by their own rules. Andersson acknowledged as much in an earlier interview. Asked how often these new buyout artists consult him, he says, "About a third of the time."

Chrysler is attracting interest from private equity even though it is hemorrhaging cash, has a cost disadvantage against Asian rivals and needs massive capital expenditures to bring new models to market. The attraction? Chrysler's potential to generate cash.

"Clearly," Andersson says, "we are in a phase where restructuring is needed. (Private equity) brings capital, and they have high expectations of management."

What worries Andersson is private equity's short-term ownership, sometimes as little as three years - a strategy sometimes termed "strip and flip." By contrast, GM's product cycles are five to six years. Many of GM's light-truck suppliers have been on board for as long as 15 years, he says.

Private equity, Andersson says, has been attracted by the size of the North American auto industry. "It is a $300 billion industry," he says. "You can easily go in and acquire companies with a couple of billion dollars of turnover on the cheap."

Even if private equity were to corner a key auto parts sector and demand better GM pricing, Andersson still could fall back on his Asian suppliers.

"We will always have alternatives," he says. "We will never put ourselves in a position of having one supplier. It's part of our DNA."

To the rescue

But GM cannot be too critical of private equity. The automaker improved its cash position by taking $14 billion from Cerberus for a controlling stake in the automaker's financing arm, GMAC. Cerberus also owns GDX Automotive, auto interior materials company Guilford Mills and Peguform GmbH, a maker of plastic parts. Cerberus also is leading a consortium that plans to buy parts supplier Delphi Corp. in bankruptcy court.

Asked which private equity firms he respects, Andersson cited Blackstone. It was Blackstone that refinanced the GM spinoff that became American Axle & Manufacturing Holdings Inc., a key GM supplier today.

In 2003, Blackstone led a group that bought the automotive operations of TRW Inc. for $4.7 billion.

Blackstone senior managing director Neil Simpkins, now chairman of TRW Automotive Holdings Inc. in Livonia, Mich., led the Blackstone team that visited Chrysler headquarters recently, The Detroit News reported.

Blackstone has a corporate war chest of about $125 billion. It has invested in about 100 companies in a variety of industries, countries and economic environments.

Cerberus, meanwhile, carries the name of the three-headed dog that guards the gates of hell. Its investment strategy often relies on injecting capital into struggling ventures. The company's portfolio includes holdings in more than 30 companies in a variety of industries.