G.M. and Chrysler Explore Merger

Rumor of the day

G.M. and Chrysler Explore Merger
http://www.nytimes.com/2008/10/11/business/11auto.html?_r=1&hp&oref=slogin

DETROIT — General Motors is in preliminary talks about a possible merger
with Chrysler, a deal that could drastically remake the landscape of the
auto industry by reducing the Big Three of Detroit automakers to the Big
Two.

The talks between G.M. and Cerberus Capital Management, the private
equity firm that owns Chrysler, began more than a month ago, and the
negotiations are not certain to produce a deal. Two people close to the
process said the chances of a merger were “50-50” as of Friday and would
most likely still take weeks to work out.

A merger would be a historic event, with two of the most iconic names in
American industry coming together to survive in an increasingly
difficult environment. Both have roots dating back decades in Detroit
and, with Ford, long dominated the auto industry — until Japanese and
other foreign car makers began making inroads into the American market.

The auto industry is being pummeled from all sides — by high gas prices
that have soured consumers on profitable S.U.V.’s, by a softening
economy that has scared shoppers away from showrooms, and by tight
credit that is making it difficult for willing buyers to obtain loans.
Both G.M. and Chrysler have been struggling with product lineups that
are out of sync with consumer demand for smaller, more fuel-efficient cars.

General Motors’ stock has fallen from more than $43 a share last year to
less than $5, and it is burning through its cash hoard at a rapid rate.
Chrysler, as a private company, no longer needs to report its finances.

The meetings between General Motors and Cerberus began more than a month
ago, said people familiar with the discussions, and the companies have
held several talks involving their most senior executives. Given that
both G.M. and Chrysler are struggling, the two sides may determine a
merger may not be in their best interests.

The exploratory talks have included debates over various calculations of
the savings that would result from a merger, these people said, but
neither side has yet to dig into each others’ private financial books
and records.

At the same time, Cerberus is continuing to hold talks with other
automakers including Nissan and Renault, said people familiar with the
discussions. It is unclear at what stage those discussions have reached.

Speculation about a possible bankruptcy filing by G.M. has mounted in
recent weeks because of the automaker’s dwindling cash reserves. The
automaker had $21 billion in cash on hand at the end of the second
quarter, but it was burning through more than $1 billion a month.

The credit rating firm Standard & Poor’s put G.M. on negative credit
watch on Thursday.

But G.M. has said it is confident that it can increase its liquidity,
and emphasized in a statement released Thursday that it was not
considering a bankruptcy filing.

G.M. once commanded about 50 percent of the American vehicle market, but
its share so far this year has fallen to 22 percent, according to the
research firm Autodata. Chrysler had a market share of about 15 percent
before its acquisition in 1998 by Daimler, but its share this year has
dwindled to 11 percent.

How government and labor might react to a potential merger of G.M. and
Chrysler is unclear. Antitrust questions could be raised, but political
issues could be overshadowed by the precarious financial prospects of
both automakers.

If G.M., the nation’s largest automaker, combined operations with
Chrysler, the smallest of Detroit’s Big Three, they would create an auto
giant that would surpass Japan’s Toyota Motor Company, which recently
has been battling G.M. for bragging rights as the world’s largest automaker.

A G.M. spokesman declined to comment on any specific talks with
Chrysler. “Without referencing this specific rumor, as we’ve often said
G.M. officials routinely discuss issues of mutual interest with other
automakers,” said the spokesman, Tony Cervone.

There was no immediate comment from Cerberus.

People briefed on the deal said the talks started as an exploration of
possible joint venture opportunities between G.M. and Chrysler.

Cerberus acquired an 80.1 percent stake in Chrysler in August 2007 for
$7.4 billion from the German automaker Daimler AG.

Under the terms of the deal being discussed, Cerberus would end up
owning an unspecified equity stake in G.M.-Chrysler, people briefed on
the talks said.

The ramifications of the merger would be enormous in the global auto
industry. G.M. and Chrysler together would control more than 35 percent
of the United States vehicle market, and be by far the dominant producer
of pickup trucks, sport utility vehicles and minivans.

It would also marry such iconic American brands as G.M.’s Chevrolet and
Cadillac with Chrysler’s Jeep and Dodge divisions.

However, the potential merger carries enormous risks. Both G.M. and
Chrysler are struggling mightily in what is the worst market for vehicle
sales in the United States in 15 years.

People close to the discussions said that if the prospective deal did
not happen, Cerberus would probably look to Nissan and Renault.

But the marriage of G.M. and Chrysler has far more potential than
hitching Chrysler to a foreign automaker. While G.M. and Chrysler may be
hamstrung by labor contracts from cutting jobs, the two companies could
combine dealers, product lines and advanced vehicle technology.

http://www.reuters.com/article/innovationNews/idUSTRE49A0X420081011

 

From what I read elsewhere GM is looking to convert their money losing
share of GMAC into something of value.
But combining almost bankrupt GM with struggling Chrysler doesn't sound
like a happy marriage.

Of course they are close for me anyway. My Chrysler dealer also owns a
GM dealership across the street.