By JOE BEL BRUNO 05.14.07, 9:40 PM ET - - Cerberus Capital Management, a private equity firm named after the three-headed hound that guarded the gates of hell in Greek mythology, got its start 15 years ago buying securities of distressed companies.
The firm run by financier Stephen Feinberg mostly shunned publicity as it quietly grew into one of the most powerful players in the private equity and hedge fund universe with $25 billion in capital. But its days mostly out of the limelight came to an abrupt end Monday with front-page headlines about its plan to invest a bargain-basement $7.4 billion to win a controlling stake in Chrysler Group.
Most of Cerberus' cash will go into rebuilding Chrysler's auto production operations, not into the pocket of DaimlerChrysler AG (nyse: DCX - news - people ). The German-based maker of Mercedes-Benz autos was so anxious to get rid of its money-losing U.S. unit that it essentially agreed to kick in as much as $650 million in cash to unwind the controversial 1998 takeover of the parent company of Chrysler, Jeep and Dodge brands.
Still, the deal represents a quantum jump in risk for New York-based Cerberus, which will now find itself on the hook for $19 billion in retiree health care costs at Chrysler, which has been losing market share to Asian competitors for years.
Feinberg, a former U.S. paratrooper who became a trader at Drexel Burnham Lambert Inc. in the 1980s, launched his investment vehicle with $10 million and has since attracted a well-known roster of investors. Pension funds such as TIAA-CREF and the California State Teachers' Retirement System are among its institutional investors.
Cerberus has also been successful in attracting Republican Party leaders to its side. Besides former Treasury Secretary John Snow, who became chairman in October, the firm lists former Vice President Dan Quayle as a director. Donald Rumsfeld, the former defense secretary, was an investor in 2001, according to published reports.
Some of its investments have also been tied to politics.
IAP Worldwide Services Inc. is owned by Cerberus and led by former executives of Kellogg (nyse: K - news - people ), Brown and Root, the subsidiary spun off by Texas-based Halliburton (nyse: HAL - news - people ) Inc., the oil services company once run by Vice President Dick Cheney. Earlier this year, the government contractor took over some work at Walter Reed Army Medical Center just as The Washington Post (nyse: WPO - news - people ) was reporting on subpar conditions at the hospital.
More than $77,000 worth of contributions were made by Cerberus employees to the Republican Party in the 2006 election cycle, according to the Center for Responsive Politics. The firm raised $49,800 for Democrats during the same period.
Cerberus has specialized in buying distressed companies - such as car rental companies Alamo and National - and then turning them around through heavy cost-cutting.
The firm owns about 50 companies, with more than 175,000 employees and combined revenue of more than $60 billion, according to its Web site. Its portfolio of companies includes such well-known names as Formica Corp. and Air Canada.
Chrysler would add to its auto industry holdings, which include a 51 percent stake in GMAC Financial Services. It also owns Guilford Mills, the largest automotive seating supplier in the U.S., and Peguform Group, a German-based manufacturer of interior and exterior plastic parts used in automobiles.
Cerberus is in the midst of a $1 billion takeover of Tower Automotive Inc. and has been in talks to buy a controlling interest in bankrupt auto parts supplier Delphi (nyse: DPH - news - people ) Corp. Those talks have stalled, but could begin again.
"Chrysler now has a 1-in-5 chance of being around 10 years from now, which is still a lot better chance than it had yesterday," said Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business. "Cerberus might be the only one out there that can do it. They have the management experience, a record of successfully cutting costs, and is willing to bet real money you can make cars in North America successfully."
Morici, and others tracking the deal, point to a "dream team" of sorts that will help increase the odds that Feinberg will turn Chrysler around. The management team includes former Chrysler chief operating officer Wolfgang Bernhard, who recently joined Cerberus as a senior executive, and David Thursfield, who ran Ford Motor Co. (nyse: F - news - people )'s operations outside of North and South America and who joined Cerberus in April 2004 as a senior member of its automotive team.
Peter Duda, a spokesman for Cerberus in New York, said he could not immediately comment about the deal.