Monday, October 13, 2008

Analysts debate wisdom of GM-Chrysler merger

DETROIT — A merger of General Motors and Chrysler could save billions of dollars but would surely mean dramatic job cuts, people familiar with discussions about the possibility said Saturday.

The revelation that Chrysler's private equity owner Cerberus Capital Management has been in talks with GM about a historic deal to remake Detroit's struggling auto industry is also a sign that Chrysler's fate is again hanging in the balance.

While Chrysler is talking with other companies about a range of potential relationships, people familiar with GM-Cerberus talks told the Detroit Free Press that a GM-Chrysler pairing makes sense to both sides. Such a deal, though, is far from certain, and could be complicated by the nation's troubled economy.

While this isn't the first time GM and Chrysler have had talks, David Cole, chairman for the Center for Automotive Research, said, "It's definitely more real" this time.

"This is one of those things that's an opportunity too good to pass up," he said. "There's a lot of talks going on pretty much across the industry.
And I think you can assume that in this there are going to be some surprises."

In fact, Ford Motor Co. confirmed Saturday that GM officials had approached it in recent weeks about joining forces, but Ford decided to remain independent.

GM needs cash

There's plenty of skepticism and caution about the risk.

"Big automotive mergers generally have not been successful," David Healy, an industry analyst with Burnham Securities, said.

Eric Merkle with Crowe Horwath LLP echoed those thoughts: "You're putting together two struggling automakers right now, and what you end up with in the end is just a big struggling automaker."

Merkle believes a potential deal hinges on GM — which has lost $18.8 billion this year — getting cash for taking Chrysler. GM needs cash to make it through the economic slump and retool its operations to build more fuel-efficient vehicles. "I don't know where the cash is coming from, but I've got to believe cash is part of the equation."

A Cerberus spokesman declined to comment Saturday. Representatives for GM and Chrysler also are not talking beyond general statements saying each company routinely communicates with others about opportunities.

An all-out merger with Chrysler would swell GM's employment ranks by 25 percent, add 3,500 dealerships to its network and create duplication of products — all of which probably would fall beneath the corporate knife.

This year has been tough for the embattled Detroit automakers. U.S. car and truck sales are down almost 13 percent across the industry, with Chrysler's sales down
25 percent and GM's down 17.8 percent. Chrysler and GM are losing money, and both companies this year have felt it necessary to issue statements that they were not considering bankruptcy.

With all of that, Van Conway of Conway MacKenzie & Dunleavy said the companies must look at all options.

"I think you've got to look at those things when you're in their situation," said Conway, an expert in reorganization and management of troubled companies. "I think you could find after the integration billions of dollars of cost savings. ... They've got two headquarters, in the white-collar ranks a significant reduction and … through product engineering there's probably some synergies there."

Deal would have benefits

The benefits of a deal to GM, according to people familiar with the talks, include:

• GM would be able to pick the best from both companies, aiming to keep the sales revenues of both and but ditching the redundant fixed costs.

• Chrysler's 11 percent U.S. market share should give GM a boost at a time when Toyota Motor Corp. is nipping at GM's heels to be the world's largest automaker.

• GM and Chrysler combined might benefit from greater access to the recently enacted $25 billion loan program.

• The merger also would give GM stronger leverage at the bargaining table with the UAW, which would have to agree to job cuts.

Cerberus, which owns 51 percent of GM's finance arm GMAC, reportedly has proposed a swap in which GM would get Chrysler's auto business, while Cerberus would get GM's GMAC stake.

"That deal would be fantastic for Cerberus," said Aaron Bragman, an industry analyst with Global Insight. "The government is about to come out and basically wipe out a whole lot of the mortgage securities problem. GMAC is about to be basically rescued by the federal government. … I don't understand why GM would want to get rid of GMAC right before the government rescue."

Others were approached

It's been a little over a year since Chrysler struck out on its own as the first privately held major U.S. automaker in more than 50 years. Cerberus acquired majority control from DaimlerChrysler, now Daimler AG, in August 2007.

Last month, Cerberus announced it had approached Daimler about acquiring the German automaker's remaining 19.9 percent stake in Chrysler. This touched off speculation in Detroit that Cerberus was preparing to sell or partner Chrysler with another car company.

Since becoming private, Chrysler has talked with or entered into several relationships with other automakers around the world.

Deals with Nissan Motor Co. announced earlier this year sparked speculation that Nissan and its partner, Renault, might be interested in adding Chrysler to its global alliance. Nissan has agreed to make two small cars for Chrysler to sell, and Chrysler will be building a pickup for Nissan, which has its North American headquarters in Franklin.

"As we have said, the company is looking at a number of potential global partnerships as it explores growth opportunities around the world," Chrysler spokeswoman Lori McTavish said in a statement Saturday. "Beyond those partnerships already announced however, Chrysler has not formed any new agreements and has no further announcements to make at this time."

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