$7.4b Chrysler deal becomes the latest in US buyout frenzy

The vast amount of cash flowing through buyout firms is reshaping businesses, industries, and the US economy, as evidenced by the pending sale of automaker Chrysler Group.

Cerberus Capital Management LP, a New York buyout firm, yesterday said it will spend $7.4 billion to buy the struggling Chrysler unit from DaimlerChrysler AG.

The German company, the maker of Mercedes-Benz, acquired Chrysler in 1998, for $36 billion.

Chrysler becomes the latest in a recent series of megadeals engineered by buyout firms, which often buy struggling public companies, take them private, and revamp them away from the pressures of Wall Street.

Among the recent deals: the $44 billion takeover of utility TXU Corp., the $27.4 billion buyout of casino operator Harrah's Entertainment Inc., and the $26.7 billion buyout of radio broadcaster Clear Channel Communications Inc., according to Thomson Financial, a provider of financial data.

What often emerge, economists said, are firms that are more competitive. But becoming more competitive can mean plant closings, layoffs, and other cost-cutting measures.

"In general, it's good for the US economy because you can get companies that are globally competitive," said John Silvia, chief economist at Wachovia Corp. in Charlotte, N.C. "But in the short term, you also get people, communities, and firms that are displaced."

Fueling the buyout spree are billions of dollars from investors and billions more in low-interest credit. Buyout firms combine investors' money with large amounts of borrowed money to make the acquisitions.

The goal is to improve the companies' financial performances, with the idea of selling and taking profits in three to five years.

Interest rates around the world are near historical lows, while the outsized returns produced by buyout firms -- sometimes in the triple digits -- are attracting more and bigger investors, including wealthy individuals, pension funds, and college endowments.

In 2006, buyout funds raised nearly $200 billion from investors, surging from $24 billion in 2003, according to Moody's Economy.com, a West Chester, Pa., forecasting firm.

Boston is a major center for private-equity investing, home to industry-leading buyout firms such as Bain Capital LLC and Thomas H. Lee Partners LP. The two combined last year to win the bidding for Clear Channel, the nation's largest radio broadcaster.

Bain Capital also provides an example of the growing financial power of buyout firms. In 2006, the firm raised a $10 billion investment fund, nearly 10 times larger than the $1.3 billion fund it raised in 1998. Its first fund, raised in the early 1980s, totaled $37 million.

"There's so much money sloshing around that it has to be put to work," said Howard Anderson, a professor at MIT's Sloan School of Management.

As in all booms, said Mark Zandi, chief economist at Moody's Economy.com, there's a risk of a bust. Since these deals rely on large amounts of borrowed money, an economic downturn could cut into the cash needed to service the debt, and lead to a domino effect of bankruptcies.

"Good things in financial markets almost always lead to excess," Zandi said. "We may not be there yet, but we're heading there."

Chrysler became a likely target for buyout firms as its poor performance hurt the stock price of DaimlerChrysler, which came under increasing pressure from investors to sell the unit. Chrysler lost $1.5 billion last year.

The pressure led Daimler to unload its American unit for what analysts said was a bargain price. Cerberus will acquire about 80 percent of Chrysler by agreeing to invest most of the $7.4 billion in the company, plus take on the billions of dollars in pension and healthcare obligations.

"They're cutting their losses," said Jesse Toprak, senior analyst at Edmunds.com, an automotive research website. "Chrysler has been a burden on Daimler, and now they can focus on what they do best: making luxury cars."

The US auto industry has struggled in recent years in the face of foreign competition and high costs, leading to plant closings and thousands of job cuts.

For example, Toyota Motor Corp.'s share of the US market has risen to about 16 percent from 10 percent five years ago, while the share of the largest US automaker, General Motors Corp., fell to 23 percent from about 29 percent, according to Edmunds.com.

Meanwhile, the US auto industry's problems were underscored yesterday by reports the Ford family is considering selling its controlling interest in Ford Motor Co. Last year, Ford lost a record $12.6 billion.

Analysts said high labor and benefit costs, particularly generous pension and healthcare benefits taken on when US automakers dominated world markets, have hurt the companies. Those costs mean that Toyota starts with an advantage of about $1,500 per car, Toprak said.

US firms have also failed in recent years to get the right cars to market at the right time, analysts said. Their delay in developing hybrid models, which allowed Toyota to quickly dominate that market, is an example, analysts said.

Cerberus's acquisition could prove the right medicine for what ails Chrysler, analysts said. As a private firm, Cerberus and its management team will be able to take difficult steps that might take time to pay off, without worrying about meeting the quarterly expectations of Wall Street.

"This is going to bring some stability to Chrysler," said John Wolkonowicz, senior North American auto analyst at Global Insight, the Waltham research firm.

"Everyone now knows who the owner is going to be, and the objective is to turn the company around and make it successful."

Material from Globe wire services was used in this report. Robert Gavin can be reached at rgavin@globe.com.