Breakingviews: Nardelli's Approach May Not Translate

THE WALL STREET JOURNAL EUROPE) IT DIDN'T TAKE Bob Nardelli long to find a new job. Private-equity firm Cerberus Capital Management has hired the former Home Depot boss to run Chrysler. But his penchant for the management fads he picked up in an earlier job, when he ran the power-systems group of General Electric, might slow the car company down. Home Depot suffered a number of problems under Mr. Nardelli. But one big one came out of his use of "Six Sigma", a product-improvement strategy famously used at GE. Six Sigma is meant to improve the consistency of products and reduce defects. At first glance, such a system sounds ideal for Chrysler, which is struggling to come up with high-quality vehicles to lure back buyers. But Mr. Nardelli's application of it at Home Depot revealed serious drawbacks when applied by retail businesses. The Six Sigma answer to one of Home Depot's main problems -- ailing revenue -- was to increase the sales per head of its work force by stretching staff and cutting incentives. That frustrated its staff, who were unable to maintain their previous level of customer service. It also proved difficult to apply to far-flung stores serving diverse buyers. Six Sigma might help Chrysler improve design and manufacturing. But the company also depends on thousands of car dealers world-wide. Depending on how these relationships are managed, Chrysler could run into the same customer-service problems that Mr. Nardelli faced at Home Depot. And, of course, Chrysler's workers are unionized, which will restrict Mr. Nardelli's ability to make radical changes. Even if Mr. Nardelli doesn't use Six Sigma this time, Cerberus's choice seems odd. Chrysler faces tough negotiations with its workers over a host of issues. They're unlikely to forget Mr. Nardelli's poor standing among his former employees. Bringing in Mr. Nardelli could be a clever tactic to show the unions that Cerberus means business. Or it could just impede Chrysler's ability to secure the concessions it needs. For Cerberus, that's a big gamble. Bear Stearns For all their financial muscle, it's amazing how vulnerable investment banks are. In the last 20 years, four major firms -- Drexel Burnham, Salomon Brothers, Lehman Brothers Holdings and now Bear Stearns -- have either been badly damaged or failed outright because they lost their creditors' confidence. For Drexel and Salomon, creditors had good reason to cut and run. Both imploded in 1990 in an embarrassment of failed junk-bond offerings and government prosecutions. Salomon got slapped with a record fine for manipulating the Treasury-bond market two years later, which led to an exodus of top deal makers. By contrast, Lehman found its credit lifelines under threat in 1998 because of ill-founded rumors of losses in Asia and Russia. But its business was no worse off than those of its peers. After a couple of months of round-the-clock road shows, Lehman's top brass persuaded creditors to keep the funds flowing. Now along comes Bear, with dead subprime-laden hedge funds, its credit rating in jeopardy and its stock a third off its January highs. It just ousted its longtime capital-markets boss, Warren Spector. Clearly, Bear's boss, Jimmy Cayne, wants to position it as a latter-day Lehman, singed by market malaise but able to carry on independently. There are good reasons to think it is. Bear has taken steps to minimize its reliance on short-term debt. It says it has enough long-term debt in place to pay off maturing short-term paper for a year -- probably long enough to get its house in order. But Mr. Cayne might benefit from a bit of friendly advice about presentation from Dick Fuld, Lehman's boss. Mr. Fuld persuaded creditors to cut Lehman some slack nearly a decade ago. Mr. Cayne and his finance chief, by contrast, spoke so darkly of the market's prospects last week that spooked investors dumped even more of the firm's stock. After its recent battering, Bear's market cap has fallen to less than half the size of Lehman's -- making it pretty bite-size. Mr. Cayne needs to do a better job of restoring investor confidence in his ability to make money if he wants Bear to bounce back. Akzo Nobel/ICI How much money does it take to make a significant difference? For Imperial Chemical Industries, it's about GBP 840 million, or about $1.71 billion. In June, the U.K. paint and chemical producer's board said a 600 pence-per-share approach from Dutch rival Akzo Nobel "significantly" undervalued the company. But a 12% increase to 670 pence, or GBP 8 billion, was enough to get an agreement to open the books yesterday. An endorsement is likely in the next few days. The industrial logic of the combination has never really been questioned. There are significant cost savings in blending the two companies' paint businesses. The stumbling block, though, was financial. Akzo didn't think its shareholders would be willing to endorse paying more than 11 times ICI's earnings before interest, taxes, depreciation and amortization for the last year. That suggested a ceiling of 600 pence. But ICI didn't want to sell for a multiple of less than 12. The entry of glue maker Henkel may allow the deal to stick together. The German company, which also makes detergents and personal-care products, has agreed to buy ICI's adhesives and electronics businesses for GBP 2.7 billion. That means Henkel is paying 34% of ICI's total price to get 25% of its operating profits. But Henkel, unlike ICI or Akzo, can probably get significant synergies, and its controlling family has endorsed the deal. Akzo still has to persuade its own shareholders that the raised price makes sense, but Henkel's involvement should make that easier. Akzo will end up offering slightly less than 11 times Ebitda for the last year on the ICI businesses that it plans to keep. That's before synergies, which should be substantial. In theory, ICI's pension deficit could yet derail a deal. But the pension trustees are likely to be happy with Akzo, which has a higher credit rating than ICI. Another bidder could come in, but it would be hard to match the Akzo-Henkel synergies. It looks like Akzo has managed to avoid painting itself into a corner. -- Lauren Silva, Dwight Cass and Edward Hadas