Comments on: Some Thoughts on the Chrysler Restructuring Plan http://www.coyoteblog.com/coyote_blog/2009/02/some-thoughts-on-the-chrysler-restructuring-plan.html Dispatches from a Small Business Sun, 12 Feb 2012 16:41:24 +0000 hourly 1 http://wordpress.org/?v=3.2.1 By: ErikTheRed http://www.coyoteblog.com/coyote_blog/2009/02/some-thoughts-on-the-chrysler-restructuring-plan.html/comment-page-1#comment-16890 ErikTheRed Mon, 23 Feb 2009 04:42:33 +0000 http://www.coyoteblog.com/?p=7192#comment-16890 Well, considering who's going to be signing the check wouldn't you expect their plan to be a bit (oh yes, wait... wait... wait for it...) Dodgy? Well, considering who’s going to be signing the check wouldn’t you expect their plan to be a bit (oh yes, wait… wait… wait for it…) Dodgy?

]]> By: K http://www.coyoteblog.com/coyote_blog/2009/02/some-thoughts-on-the-chrysler-restructuring-plan.html/comment-page-1#comment-16887 K Sun, 22 Feb 2009 17:38:05 +0000 http://www.coyoteblog.com/?p=7192#comment-16887 The Big Three have a sad history over the last few decades. Where is the evidence that Chrysler management and owners can run a car company successfully even before this recession or depression or, as I call it, a disaster in progress. Every party with money sunk in Chrysler is unwilling to invest any more. That clearly tells us to let them go. It is the US that taxpayers should be concerned about. And there is no benefit for the US in bailing Chrysler out or prolonging the agony. Much the same can be said of GM and Ford. Neither is healthy except by comparison to Chrysler. I don't like the government choosing the winners among private companies. Yet that is exactly what Washington and states seem determined to do. If it must be so then at least provide the help to the least hapless. The Big Three have a sad history over the last few decades. Where is the evidence that Chrysler management and owners can run a car company successfully even before this recession or depression or, as I call it, a disaster in progress.

Every party with money sunk in Chrysler is unwilling to invest any more. That clearly tells us to let them go. It is the US that taxpayers should be concerned about. And there is no benefit for the US in bailing Chrysler out or prolonging the agony.

Much the same can be said of GM and Ford. Neither is healthy except by comparison to Chrysler.

I don’t like the government choosing the winners among private companies. Yet that is exactly what Washington and states seem determined to do. If it must be so then at least provide the help to the least hapless.

]]> By: Link http://www.coyoteblog.com/coyote_blog/2009/02/some-thoughts-on-the-chrysler-restructuring-plan.html/comment-page-1#comment-16886 Link Sun, 22 Feb 2009 16:57:41 +0000 http://www.coyoteblog.com/?p=7192#comment-16886 Accurate math and realistic financial planning are the last things on their minds. Chrysler's nominal owner Cerberus only cares about how GMAC comes out of this. The real owners of Chrysler and GM are the debtholders and the UAW, but they can't or won't sort out their relative positions until they can see how much they can get from Obama & Co. No one in their right mind would consider investing in a Big Three automaker these days. The idea that you could create company-specific projections of returns when the industry is down to 10 million of new car sales ... and may be stuck there for an indeterminate time ... is laughable. Accurate math and realistic financial planning are the last things on their minds. Chrysler’s nominal owner Cerberus only cares about how GMAC comes out of this. The real owners of Chrysler and GM are the debtholders and the UAW, but they can’t or won’t sort out their relative positions until they can see how much they can get from Obama & Co.

No one in their right mind would consider investing in a Big Three automaker these days. The idea that you could create company-specific projections of returns when the industry is down to 10 million of new car sales … and may be stuck there for an indeterminate time … is laughable.

]]> By: Rich http://www.coyoteblog.com/coyote_blog/2009/02/some-thoughts-on-the-chrysler-restructuring-plan.html/comment-page-1#comment-16885 Rich Sun, 22 Feb 2009 16:53:00 +0000 http://www.coyoteblog.com/?p=7192#comment-16885 This plan states the company is cutting costs. Yet this past week while I was on vacation in Jamaica at Sandals White House an all inclusive resort (minimum daily rate of $500 a day) MOPAR held a convention for over 100 people for 4 days. Add in air fare how much money was wasted on this event? Is this a good use of bailout money? I don't think so. This company continues its wasteful ways at taxpayers expense! This plan states the company is cutting costs. Yet this past week while I was on vacation in Jamaica at Sandals White House an all inclusive resort (minimum daily rate of $500 a day) MOPAR held a convention for over 100 people for 4 days. Add in air fare how much money was wasted on this event? Is this a good use of bailout money? I don’t think so. This company continues its wasteful ways at taxpayers expense!

]]> By: Bill http://www.coyoteblog.com/coyote_blog/2009/02/some-thoughts-on-the-chrysler-restructuring-plan.html/comment-page-1#comment-16884 Bill Sun, 22 Feb 2009 15:45:19 +0000 http://www.coyoteblog.com/?p=7192#comment-16884 Largely spot-on analysis; I share your reaction. We shouldn't expect anything better. These execs are supplicating before politicians, not market-based sources of funding. How many members of Congress or their staffers can understand any sort of rudimentary valuation model, let alone the subtleties in a methodologically correct valuation? I'll take your valuation criticism a step further. They're apparently valuing free cash flows, not the free cash flow (solely) to common equity. Therefore, the correct cost of capital is probably the WACC, not the cost of equity. And anyway the first lesson of valuation in an introductory MBA corp finance course is that you don't conduct scenario analyses by varying the cost of capital. You do it by varying the cash flows (which, you note, are laughable to begin with) and examining the NPV according to the intrinsic cost of capital. (I realize there are subtleties according to whether the leverage ratio is fixed or varying with time.) The cost of capital is a function of the cost of debt, the cost of equity, the marignal tax rate and the amount of leverage in the capital structure. Both the COE and the COD are at a first order level functions of the underlying assets and industry. Increasing leverage makes the debt riskier and the equity less risky. That's what the WACC calculation comprises. Arbitrarily sticking a high cost of equity on a DCF valuation is not the proper way to do the job; it's as meaningless as cranking out ludicrous cash flows. That's the greatest criticism of the Chrysler summary valuation chart. Calculate the cost of capital and then vary the cash flows according to the value drivers. It's not that Chrysler's equity has a cost of capital of 40%. It's that it has a cost of perhaps 9 or 10% at most (?) but that the cash flows are extraordinarily anemic and subject to great negative volatility. Largely spot-on analysis; I share your reaction. We shouldn’t expect anything better. These execs are supplicating before politicians, not market-based sources of funding. How many members of Congress or their staffers can understand any sort of rudimentary valuation model, let alone the subtleties in a methodologically correct valuation?

I’ll take your valuation criticism a step further. They’re apparently valuing free cash flows, not the free cash flow (solely) to common equity. Therefore, the correct cost of capital is probably the WACC, not the cost of equity.

And anyway the first lesson of valuation in an introductory MBA corp finance course is that you don’t conduct scenario analyses by varying the cost of capital. You do it by varying the cash flows (which, you note, are laughable to begin with) and examining the NPV according to the intrinsic cost of capital. (I realize there are subtleties according to whether the leverage ratio is fixed or varying with time.)

The cost of capital is a function of the cost of debt, the cost of equity, the marignal tax rate and the amount of leverage in the capital structure. Both the COE and the COD are at a first order level functions of the underlying assets and industry. Increasing leverage makes the debt riskier and the equity less risky. That’s what the WACC calculation comprises.

Arbitrarily sticking a high cost of equity on a DCF valuation is not the proper way to do the job; it’s as meaningless as cranking out ludicrous cash flows. That’s the greatest criticism of the Chrysler summary valuation chart.

Calculate the cost of capital and then vary the cash flows according to the value drivers. It’s not that Chrysler’s equity has a cost of capital of 40%. It’s that it has a cost of perhaps 9 or 10% at most (?) but that the cash flows are extraordinarily anemic and subject to great negative volatility.

]]> By: ben http://www.coyoteblog.com/coyote_blog/2009/02/some-thoughts-on-the-chrysler-restructuring-plan.html/comment-page-1#comment-16883 ben Sun, 22 Feb 2009 10:32:41 +0000 http://www.coyoteblog.com/?p=7192#comment-16883 <i>And speaking of electric cars, any intelligent restructuring plan would recognize that electric cars, even if they are successful in the marketplace, are not going to be anything but a cash drain for years. This kind of thing has to be put on hold while the company gets back on its feet. But instead, since this is a political and not a business document, Chrysler is practically leading with it. In fact, the sections “4: Commitment to Energy Security and Environmental Sustainability”, “5: Compliance with Fuel Economy Regulations,” and “6: Compliance with Emissions Regulations” all come in priority order ahead of “7: Achieving a Competitive Product Mix and Cost Structure.” In fact, this section about costs and competitive products comes dead last in the plan. LOL, a “business” plan, indeed.</i> I love this paragraph. This is why I read Coyote Blog. And speaking of electric cars, any intelligent restructuring plan would recognize that electric cars, even if they are successful in the marketplace, are not going to be anything but a cash drain for years. This kind of thing has to be put on hold while the company gets back on its feet. But instead, since this is a political and not a business document, Chrysler is practically leading with it. In fact, the sections “4: Commitment to Energy Security and Environmental Sustainability”, “5: Compliance with Fuel Economy Regulations,” and “6: Compliance with Emissions Regulations” all come in priority order ahead of “7: Achieving a Competitive Product Mix and Cost Structure.” In fact, this section about costs and competitive products comes dead last in the plan. LOL, a “business” plan, indeed.

I love this paragraph. This is why I read Coyote Blog.

]]> By: Brian Dunbar http://www.coyoteblog.com/coyote_blog/2009/02/some-thoughts-on-the-chrysler-restructuring-plan.html/comment-page-1#comment-16882 Brian Dunbar Sun, 22 Feb 2009 05:04:42 +0000 http://www.coyoteblog.com/?p=7192#comment-16882 My assumption is that the guys that run Chrysler are reasonably bright and know their business. <i> ... explain how they are going to sell cars at a price that covers their costs as well as a return for shareholders.</i> Assuming this is a goal the people running Chrysler would like to achieve .. I think it is possible that this is an impossible task for that organization. My assumption is that the guys that run Chrysler are reasonably bright and know their business.

… explain how they are going to sell cars at a price that covers their costs as well as a return for shareholders.

Assuming this is a goal the people running Chrysler would like to achieve .. I think it is possible that this is an impossible task for that organization.

]]>