Volume III, Issue 10, Page 20

News & Analysis

GM-Chrysler Merger?

ould the present economic crisis and automotive sales slump mean that General Motors and Chrysler LLC could merge? Could be.

Several media, including the New York Times and the Wall Street Journal have reported that GM and Cerberus Capital Management LP, which owns 80.1 percent of Chrysler, have had initial talks about a merger or partnership.

What would be anathema in the normal course of business, might be a possibility now that new car sales have plunged to near-bankruptcy levels.

Several long-time large Chevrolet dealerships have closed over the past few weeks and both GM and Chrysler have been closing plants and cutting back production for several months. So far this year, GM's United States sales have dropped 17.8 percent, while Chrysler's are down 25 percent.

In a letter to employees on Oct. 13, Chrysler's chairman, Robert Nardelli, declined to confirm the GM discussions but said his company was actively exploring deals with other automakers.

At GM, the merger talks with Cerberus are being led by Rick Wagoner, the chairman, and Frederick A. Henderson, the president. The two executives briefed GM's board on the discussions last week, and a special committee of directors was created to monitor the talks.

“Mergers occur if you have mutual benefits, if there’s synergy,” said David Cole, chairman of the Center for Automotive Research. “It has to make sense for both sides.”

Does it make sense for the two arch-rivals to come together? In these economic times, all businesses are under pressure to get leaner and more cost effective. If the deal gets done, Chrysler would probably be under GM’s control and speculation is that GM would keep Chrysler’s Jeep brand but either eliminate or sell the Dodge and Chrysler operations.

GM has many brands that are in competition with Chrysler products, such as full-size pickups, so if GM were to take control of a merged company, the Dodge Ram model would be the easiest to lose, letting the GMC Sierra and Chevrolet Silverado increase market share.

Chrysler has a large presence with minivans, which GM does not make, so that would fill a void in GM’s product line.

But what GM really needs is cash. Industry experts have estimated that Chrysler has about $10 billion in cash, which would keep GM going for an extra nine to 12 months at their current rate of spending.

GM and Cerebrus already have a working relationship with both companies owning a percentage of GMAC Financial Services. The Wall Street Journal reports that Cerberus is interested in swapping its ownership in Chrysler for GM’s 49 percent stake in GMAC. Cerberus already owns 51 percent, which it bought in 2006. The insurance, auto and real estate financing business has been hit hard by the sub-prime mortgage fiasco, but is among those institutions helped by the recent $700 billion government bailout. With the bad debt wiped out by the government, GMAC would be positioned to return to making money for its investors. Cerberus has the potential for making more return on investment (ROI) in less time than if they stay with Chrysler.

Last week Standard & Poor’s Rating Services said that GM and Chrysler have enough cash and lines of credit for this year, but question what would happen in 2009, which puts even more pressure on the companies to act quickly.

Analysts predict that as a merged company, GM and Chrysler could ask the United Automobile Workers union for concessions on wages and health care that would shave costs from their combined operations. The UAW hasn’t released a statement, but we can’t imagine they would be happy about fewer cars to build and tougher contract negotiations.

Talks of a merger with Chrysler boosted General Motors' stock 18 percent on Monday, Oct. 13, after trading near a 60-year low last week amid speculation that GM could go into bankruptcy.

The deal seems to be a good one for Cerberus, which is, after all, only interested in making money, not in saving any particular company. If GM gets the cash infusion, it only makes good business sense to get rid of Chrysler brands and plants that compete with their already large line of automobiles and trucks.

So, where does that leave the Chrysler and Dodge brands? And importantly, how would this possible merger affect those two companies’ rather large financial commitment to auto racing sanctioning bodies and teams?  It’s still way too early to be sure, but there are a couple of obvious scenarios. Either gone, like the Oldsmobile, or… has anybody talked to Ford?