GM and Chrysler Merger Talks - Is the General Insane?

[MKSheppard]

Didn't see this anywhere else; and since you guys just LOVE car talk

I decided to start one here.

I for the reason of me, cannot see any plausible or credible reason for GM to acquire Chrysler. There's nothing of Chrysler that's actually worth anything except the Jeep brand, and that's not going to be profitable with gas prices; and it would cannibalize GM's Hummer division's sales.

It *might* work if Chrysler was reduced to the status of a Concept Car / Low Production of Said Concept Cars Division; but that would never get through all the entrenched Chrysler assembly workers; and GM doesn't need pretty much anything that Chrysler produces; since Chrysler products have a well deserved reputation for sucking and being unreliable POSes.

[Gerald Tarrant]

What I've been hearing is that Chrysler's cash reserves could help keep GM afloat.

General Motors Corp. doesn't need Chrysler LLC's brands, workers or plants, but if the companies merged, the Auburn Hills automaker's $11.7 billion in cash could help GM survive the worst sales market in 15 years, analysts said Monday.

The cash, which Chrysler said it had on June 30, and an estimated cost savings of about $6 billion through combining automotive operations, is a key reason why GM and Chrysler-parent Cerberus Capital Management LP are discussing a possible merger that otherwise makes little sense for either company, analysts said.

Barclays Capital analyst Brian Johnson said GM needs $10.3 billion in fresh cash through next year, at which point the automaker could see significant savings from a new union contract and a possible sales boost from fuel-efficient models such as the Chevrolet Cruze and Volt, an extended-range electric car. A deal with Cerberus could quench GM's cash quest, said auto analyst Erich Merkle of Crowe Horwath.

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"It's the smell of money," attracting GM's interest in any deal, Merkle said. "GM needs cash to live to fight another day."

Officials at both GM and Cerberus have declined to comment about their discussions.

Meanwhile, GM's shares rebounded Monday, jumping $1.62, or more than 33 percent, to close at $6.51 following news of steps being taken by major governments to support the global banking system.

But merger talks -- which have stalled amid the Wall Street turmoil -- did not improve the automaker's credit rating or convince analysts that GM would benefit from a potential Cerberus deal.

Standard & Poor's didn't budge Monday from last week's decision to place GM's credit rating on CreditWatch with negative implications, which means the rating could fall further into junk status.

Any merger would not solve GM's immediate challenge raising cash, said Robert Schulz, S&P's credit analyst.

"We would be skeptical that a GM-Chrysler transaction could easily address our primary concern by resulting in a substantial increase of current liquidity for the parties involved," Schulz said.

GM is burning through at least $1 billion a month. It had access to about $21 billion cash and $5 billion in available credit at the end of June and is in the midst of cutting $10 billion in costs by the end of 2009 and raising $5 billion through asset sales and borrowing.

Those cost-cutting moves intensified Monday when GM announced it was closing plants in Grand Rapids and Janesville, Wis. The moves affect about 2,500 hourly workers at plants that produce sport-utility vehicles and parts for pickups and SUVs.

The Grand Rapids facility will close by the end of 2009 while the Janesville factory will close ahead of schedule in December. GM officials had said in June the Janesville plant, along with three others, would close in 2010 as demand slumped for pickups and SUVs.

It was unclear exactly how much money GM will save by idling those plants.

S&P believes GM has enough cash and available credit for the rest of 2008 but the deteriorating industry -- GM's sales are down 18.1 percent this year -- will be challenging next year

Meanwhile, analysts remained skeptical about any GM/Chrysler deal three days after merger talks first surfaced.

Any short-term gain from acquiring Chrysler could come at the expense of long-term health, said Deutsche Bank analyst Rod Lache.

"The fact that there is so much product/geographic overlap between the companies is precisely the reason for the large ... savings potential in a GM/Chrysler combination," Lache wrote in a research paper Monday.

A merger would not have a significant benefit or address shared problems such as too many dealers, damaged brands, falling sales, overcapacity and inability to raise cash, said Aaron Bragman, an auto analyst with Global Insight.

A combined company would have larger market share and be in a stronger bargaining position with the United Auto Workers. Another round of talks is likely considering GM's struggles, he said.

"The negatives far outweigh the positives for any potential merger of GM and Chrysler," Bragman wrote in a research paper published Monday.

"The details of what a combined GM/Chrysler would look like point to a company that would immediately be in an even worse position than either of these companies are alone."

The real winner might be Cerberus if it swaps Chrysler for the 49 percent share of GMAC Financial Services owned by GM, Bragman said.

Cerberus, a private equity fund, acquired 51 percent of GMAC in a $14.1 billion deal in 2006.

The recently passed $700 billion Wall Street bailout bill is designed to buy up bad securitized mortgages and lobbyists are pushing to extend the bailout to include bad auto loans.

"That one-two punch would go a long way towards restoring the profitability of GMAC, making it an attractive business to have," Bragman said.

I remember hearing something similar on NPR

[Gerald Tarrant]

oops. Left off the link

Link

[KrauserKrauser]

Anything to prop it up longer before the inevitable fall.

[aerius]

It's actually pretty simple, if they do it they get a big fat government bailout, in effect, the government pays them to buy out Chrysler. Then once the buyout's done they can strip Chrysler apart and sell them for cash.

[J]

In addition, GM reduces its ownership share of GMAC, which is of course bleeding money like there's no tomorrow since it has heavy exposure to garbage loans of all sorts plus a whole bunch of dead car loans which are also gushing red ink. GMAC is more or less a giant subprime holding company at this point, most of their loans & other assets have gone bad with little to no hope of recovery anytime soon. That's why they're restructuring into a commercial bank so they can beg money from the government via the new TARP program.

Then there's those new tax write-off rules which Wells-Fargo used to their advantage in buying out Wachovia. Granted, I haven't looked at either GM nor Chrysler's balance sheets, but I wouldn't be surprised if GM receives a substantial tax write-off in addition to government bailout money if they succeed in buying out Chrysler.

[Ma Deuce]

Anything to prop it up longer before the inevitable fall.

GM is hoping Chrysler's cashpile will see them through until 2010: That's when the VEBA that GM, Ford and Chrysler negotiated with the UAW kicks in, relieving GM of it's healthcare liabilities and saving them billions a year, though they had to dump a $24 billion initial payment into the fund, which took most of their remaining cash reserves. Ironically, this very same VEBA could be what kills this merger attempt, since GM would have to negotiate a new accord with the UAW concerning the trust, and the union has made it clear they will not support any mergers between their employers.

[aerius]

Reuters link

GM, Chrysler merger on hold as aid hopes fade: sources
Fri Oct 31, 2008 5:20am EDT
By Jui Chakravorty Das and Kevin Krolicki

NEW YORK/DETROIT (Reuters) - A deal to merge General Motors Corp (GM.N: Quote) and Chrysler LLC has hit an impasse after the Bush administration ruled out funding for it, three people with direct knowledge of the talks said.

This puts any merger of the struggling automakers on hold until after the U.S. presidential election, the sources said.

The development adds a new element of uncertainty for the embattled U.S. auto industry as Detroit's political allies warn the sector faces a deepening financial crisis that threatens tens of thousands of jobs.

It also opens the door for Cerberus Capital Management, which owns Chrysler, to restart talks with the Nissan-Renault alliance run by Carlos Ghosn. The private equity firm has seen that option as a backstop to an outright acquisition of Chrysler by GM, one of the sources said.

The sources declined to be named as they were not authorized to discuss the private talks. GM and Cerberus declined comment.

This week, Ghosn said he sees any deals among automakers involving a cash element as unlikely unless the cash came from outside, such as from the government.

Discussions with Nissan-Renault (7201.T: Quote) (RENA.PA: Quote) would likely start with consideration of an expanded product-based tie-up building on an existing deal between Chrysler and Nissan, the source familiar with those talks said.

A merged GM-Chrysler would be the largest automaker by sales, but analysts have cautioned it would struggle to turn around the overlapping Detroit-based operations of two firms that have seen mounting losses tied to a global downturn.

Chrysler, which has seen its sales fall 25 percent this year, said it was moving ahead with a cost-cutting plan and with plans for new vehicles, including a plug-in hybrid.

"We are taking the tough but necessary decisions to stabilize the business in the short-term and making the viable long-term business decisions to restructure the company for the future," Chrysler spokeswoman Lori McTavish said.

GM and Cerberus have been in talks since September, according to sources.

GM had approached the U.S. Treasury in recent days about support for the merger through some $10 billion in new funding that would have included taking an ownership stake in the merged company, people familiar with the talks have said.

TREASURY STAYS AWAY

But a Bush administration official said on Thursday the Treasury Department was not negotiating direct aid for the merger.

Instead, the official told Reuters, the administration was working to speed the distribution of $25 billion in low-cost loans for automakers to retool factories, a move that was authorized by Congress last month.

With merger aid off the table, talks about combining GM and Chrysler are on hold until after the November 4 election when the parties hope to sit down with representatives of the new administration, the sources said.

A decision by the Bush administration to provide the government's first funding for the auto sector since the $1.5 billion bailout of Chrysler in 1980 had been widely seen as the merger's best chance for success.

Private investors consulted in the course of the talks have not expressed interest in providing funding for the controversial deal in the absence of government backing, people with knowledge of the talks have said.

In the absence of a deal, Cerberus pushed ahead with a restructuring for GMAC LLC, the money-losing auto finance and mortgage provider in which it owns a 51-percent stake.

The Detroit-based lender said it was in talks with federal regulators about becoming a bank holding company, which would make it easier for it to participate in a $250-billion bank recapitalization plan.

GM shares, down 76 percent since the start of the year, have reacted this week to word of its progress in the merger talks and its lobbying for federal aid. The stock closed down 10 percent on Thursday after the Bush administration official ruled out merger help from the Treasury.

Analysts have challenged the merits of a GM merger with Chrysler. Grant Thornton consultant Kimberly Rodriguez issued a study on Thursday estimating that a GM merger with Chrysler would likely cut jobs for up to 40,000 of Chrysler workers.

Democratic presidential candidate Barack Obama told NBC news in an interview he would meet with Detroit automakers and union representatives if elected.

"My hope is if I'm elected, that I'm immediately meeting with the heads of the Big Three automakers as well as with the United Auto Workers," Obama told NBC. "And to sit down and craft a strategy that puts us on a path for an auto industry that can compete with anybody in the world."

Republican John McCain's campaign has said he favors moving to disburse the $25 billion in low-interest loans already approved for the industry as a first step.

Yup, right again. Merger on hold because they can't get free government money.

[The Yosemite Bear]

Hey GM time to bring back the Metro, this time with a hybrid engine.

[montypython]

There's a better probability of Renault stepping to take over Chrysler instead, they have much more to gain from it (dealers and production capacity for reintroduction of Renault vehicles in NA) and have a better financial wherewithal to do so.

[Stormbringer]

I'm willing to bet a Democratics government will be bailing out the big three. There are too many union jobs at stake to let one of them go under.