The dog that ate Detroit

(Fortune Magazine) -- A Wall Street firm buying a Big Three automaker was once unimaginable. But disbelief was everywhere when DaimlerChrysler (Charts) announced the sale of its Chrysler Group to hedge fund Cerberus Capital Management. "I don't know about the Cerberus rumors. As far as I know, we're still in, working on this deal," a member of the Blackstone Group's brain trust told Fortune on the morning of May 14, when news broke of the $7.4 billion deal. Now Cerberus's ninja-worthy tactics have left rival financiers wondering how the firm works and just how Stephen Feinberg, its billionaire founder, won over the automaker's unions.

"It's hard to characterize Cerberus, because we're not a pure financial play the way some of these houses are," John W. Snow, Cerberus's chairman, told Fortune. "Cerberus is a blend. It's not quite GE, but it may be the closest thing to a GE in the private investment business."

Part hedge fund, part private-equity firm, Cerberus began 15 years ago as a distressed-debt shop. Feinberg, now 47, had learned credit markets under Michael Milken at Drexel Burnham Lambert. He started his own firm with $10 million. (Cerberus's portfolio companies currently generate more than $60 billion in annual revenues.) When he realized that vulture investing would take him only so far, he plunged into turnarounds.

Snow, 67, formerly the Treasury Secretary and chief executive of railroad company CSX (Charts, Fortune 500), embodies Feinberg's penchant for collecting management expertise and then letting the executives be the face of the company. Other private-equity firms rely heavily on consultants and bankers for deal diligence. Of Cerberus's roughly 300 investment and operations people, more than 150 are former top executives.

So there's little need for telecom bankers at Cerberus with Timothy Price, a former president of MCI, on staff. In automotive, the firm has a team including David Thursfield, a Ford (Charts, Fortune 500) veteran, and Tom Gale, a former Chrysler designer. "This is a highly intelligent group of people," says dealmaker Wilbur Ross, who has bid against Cerberus - and lost. Cerberus has endured its share of defeats too. Shares of Cerberus-controlled building products maker BlueLinx have gone nowhere since its 2004 IPO. Its deal to buy Israel's Bank Leumi recently crumbled.

Feinberg, a self-styled anti-elitist, relishes deals where he beats established players like KKR, as he did with the 2006 acquisition of Albertson's, the grocery chain. He drives a Chevy pickup, and the closest thing to fine art in the firm's Park Avenue headquarters is a poster for the hip-hop group the Fugees that hangs in a lieutenant's office.

The firm's interests range from aerospace to hotels, but the company is doing more than scooping up assets. It has put together a portfolio of financial services companies, from banks like Japan's Aozora, to captive finance operations like GMAC, to consumer lending, mortgage finance, and commercial leasing businesses.

Unlike a typical industrial buyout, Cerberus didn't borrow against GMAC's assets, a tactic it intends to repeat when it picks up Chrysler Financial, the carmaker's finance unit. Such "deleveraged buyouts" may prove shrewd: A highly leveraged auto-finance company would incur higher borrowing costs.

"Finance companies obviously do better when they can borrow at low interest rates," says Snow. "That calculus is part of our thinking." Company officials say there are no plans to merge GMAC and Chrysler Financial. However, Mark Wasden, a Moody's credit analyst, cautions against confusing demurral with denial. "They would have thought very carefully about the potential in combining some portion of GMAC and Chrysler Financial," he says.

Despite its origins in the rapacious world of distressed debt, Cerberus has proved adept at dealing with unions. It won the support of the often rancorous United Food and Commercial Workers union at Albertson's. And after Cerberus took control of the Sheraton Palace hotel in San Francisco in 2005, it was able to step in and help resolve a protracted standoff between a group of the city's hoteliers and their unionized workers.

"Our union has a good relationship with Cerberus," says Bruce Raynor, president of Unite Here, the hotels' union (whose pension fund invests in several Cerberus funds). "They worked with us to get things done."

Cerberus played a similar role on the creditors' committee of MCI during that firm's trip through bankruptcy. "They were peacemakers more than they were hard-nosed negotiators," says Michael Capellas, MCI's former CEO.

Turning on the charm is becoming a core competency. On the day Cerberus agreed to buy Chrysler, Buzz Hargrove, president of the Canadian Auto Workers (CAW), wasn't shy about his feelings for buyout artists: "Private-equity groups traditionally come in and slash and cut and sell, leaving a lot of people jobless." That statement was before Feinberg hopped on a plane and met Hargrove in Auburn Hills, Mich., where Chrysler is based. "He gave us all letters that said there will be no job losses. He was very genuine, not some highfalutin billionaire. It was real talk," says Hargrove, who may have had an effect on Feinberg too. On his recent Michigan visit the Cerberus founder started shopping for a new car - a Dodge.