Monday, December 04, 2006

Bare Naked Capitalism.

Bloomberg: Cerberus May Buy Delphi Car-Parts Plants, People Say.

Ben Stein on Cavuto on Business (Fox News) keeps making this suggestion, and it is sort of interesting, so I thought I'd bring it up.

So, here's the pitch:

A money losing auto parts making operation, currently in bankruptcy, desperately in need of major restructuring, saddled with sky-high union salaries, serious pension obligations, spun off from a parent automaker (General Motors) that is in similar shape.

Sounds awesome, right? It's Delphi. (DPHIQ.PK - the 5 character symbol and .PK because it is in bankruptcy and booted off the major exchanges)

Well, maybe.

Normally, you should run for the hills from this kind of investment (I hesitate to call it an investment, let's call it a speculation.) Or perhaps you buy the bonds. Never, never, never, ever buy the stock. Except maybe this time.

All kidding aside, normally when a company goes into bankruptcy, the stock is ultimately worthless, anyone holding the stock loses everything, and the bondholders end up owning the company with newly issued stock (think Kmart). So even though you may see stocks trade during bankruptcy, it is almost always people flushing their money straight down the toilet.

However, in Delphi's case, you have a major hedge fund - Appaloosa Capital - with a very sharp manager - David Tepper - as a major holder of the stock, trying to work a deal here where the unions accept lower pay rates, various factories are sold off to interested parties, other costs are rationalized, etc. etc. [Note that the article highlights Cerebrus. I'm more interested in Appaloosa, which is also mentioned.] Obviously though, getting people to take huge pay cuts is not easy. If things go wrong, the stock will be worthless, the bondholders will end up with everything. And, we'll also note, Kirk Kerkorian, an investor who knows a few things, just dumped his entire stake in General Motors when he lost faith in their ability to make the major changes he was seeking. So Mr. Tepper has his work cut out for him.

I will note that in response to Ben Stein's suggestion to buy the stock, former hedge fund manager Jim Rogers suggested buying the bonds instead, which is safer. But if this works out for Appaloosa, the stock is going to give you much more juice than the bonds.

I leave you with the wisdom of Oingo Boingo:

There's nothing wrong with Capitalism
There's nothing wrong with free enterprise
Don't try to make me feel guilty
I'm so tired of hearing you cry

There's nothing wrong with making some profit
If you ask me I'll say it's just fine
There's nothing wrong with wanting to live nice
I'm so tired of hearing you whine
About the revolution
Bringin' down the rich
When was the last time you dug a ditch, baby!