Analysis: Cerberus wants full ownership of GMAC to merge with Chrysler Financial

[nadepalma]

Similar articles have been posted, but not sure if I saw this particular one on GMI yet. Sorry if it's a repost.

SOURCE: Detroit News

Cerberus eyes full ownership of GMAC; analysts skeptical
Robert Snell and Christine Tierney / The Detroit News
Saturday, October 11, 2008

Cerberus Capital Management LP is interested in acquiring full ownership of GMAC Financial Services in potentially far-reaching discussions with General Motors Corp. that could involve a merger of two of Detroit's three automakers, according to sources familiar with the talks.

But analysts and industry executives were highly skeptical of any deal involving a merger of GM's automotive operations with those of Chrysler LLC.

"If this were to take place, the winner would be Cerberus," which would benefit by combining the financial operations, said Maryann Keller, a longtime analyst and head of Maryann Keller & Associates in Stamford, Conn.

A source familiar with the preliminary talks said Saturday that Cerberus wanted to acquire the remainder of the GMAC mortgage and auto loan unit that it already controls and shed Chrysler's automotive operations.

Cerberus and GM declined to comment.

Based on reports outlining the deal under consideration, analysts said they could see the advantage to Cerberus of combining GMAC with Chrysler Financial Services and exiting the car-making business.

Cerberus purchased 51 percent of GMAC from GM in 2006 for $14.1 billion. It owns Chrysler Financial Services after purchasing Chrysler last year from Daimler AG for $7.4 billion.

"There could be a lot of cost reduction from servicing the two loan operations with one back office," said John Casesa, managing partner of Casesa Shapiro Group. He said Cerberus wanted to combine the two but GM had resisted, preferring to have GMAC dedicated to its own auto business.

However, analysts questioned the logic of a merger of GM and Chrysler's auto operations.

"The companies have a very similar footprint," said David Healy, an analyst at Burnham Securities. "Except for administrative costs, I don't see the advantage of putting them together. I don't see the merger of the car companies as being the solution for anybody's problems."

A deal with Chrysler would not address GM's pressing need to raise cash, Keller said.

On the contrary, acquiring Chrysler's automotive operations would compound GM's problem of having more brands and dealers than it can sustain, she said.

"GM is in trouble having eight brands and too many dealers, why would they want three more brands and 3,000 more dealers?" Keller said.

If GM ends up with Chrysler's automotive operations, it would face UAW scrutiny if it tried to shed jobs and plants, Keller said.

"They would have to have the UAW sitting there. I don't see how they would do it," she said. "It's lots of plant closings, lots of people gone."

On the other hand, GM and Chrysler could benefit by teaming up on the development of new models or new, more-efficient engines and powertrains, Healy said. But he said the two organizations could accomplish that without risking the complications of a merger.

For instance, GM and Chrysler have worked together in the recent development of the two-mode hybrid system, along with BMW AG and Daimler.

The discussions between GM and Cerberus, first reported Friday, appear to confirm recent speculation that Cerberus wanted to get out of the dramatically deteriorating U.S. auto industry.

"They didn't know what they were getting into -- nobody did at the time," Healy said. "The situation in the industry has been calamitous."

The outlook has worsened since GM announced a cash-raising plan in July aimed at cutting costs by $10 billion by the end of 2009 and raising $5 billion through asset sales and borrowing.

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 but an analyst Friday said the automaker will probably need $10.3 billion in fresh cash through next year to maintain a minimum liquidity of $14 billion.

Chrysler executives told dealers last month that the company has lost at least $400 million this year. Chrysler Holdings LLC, which includes the auto company and its finance arm, Chrysler Financial, lost $510 million in the first three months of 2008, the company said in July. Chrysler lost $1.6 billion in 2007.

MORE HERE

[mgescuro]

I think Cerberus just lost one of its heads.

[nadepalma]

If Cerberus' main aim is to get GMAC and Chrysler Financial to merge, then why not invite GM to keep their stake and get the merger with their blessing? A combined finance company could better serve GM and Chrysler's operations and there wouldn't need to be a push to throw GM and Chrysler in bed with each other.

Just a thought - but why WOULDN'T they consider this?

[mgescuro]

If Cerberus' main aim is to get GMAC and Chrysler Financial to merge, then why not invite GM to keep their stake and get the merger with their blessing? A combined finance company could better serve GM and Chrysler's operations and there wouldn't need to be a push to throw GM and Chrysler in bed with each other.

Just a thought - but why WOULDN'T they consider this?

So you're advocating the recreation of GM with Chrysler + ChryFin under the auspices of Cerberus?

If GM really, truly wanted to merge with someone, it should be a bus manufacturing company.
With the advent of a green movement, it would behoove GM to jump back on the bandwagon of mass transit.

Perhaps acquiring Scania or even Neoplan. Rebadge their buses as GMC for the US.
Then start incorporating GM's hybrid diesel systems into these buses.

but that's just me.

Personally a GM + Chrysler combination would doom both. Too much overlap. No economies of scale. Bad processes. And it ultimately doesn't solve GM's problems.

[nadepalma]

So you're advocating the recreation of GM with Chrysler + ChryFin under the auspices of Cerberus?

No. I didn't make myself clear in my original post. Sorry

What I was driving at was, this article makes it seem as though Cerberus' REAL aim behind giving Chrysler to GM is to get GM's 49% stake in GMAC so they can merge it with Chrysler Financial. I say that instead of forcing GM to merge with Chrysler, why not just invite GM to keep their 49% stake in GMAC and merge Chrysler Financial anyway? That will create a better finance company, GM can keep their (now diluted) stake in the new company and it would avoid forcing GM and Chrysler to merge.

Then to sweeten the pot, GM could agree to an "industrial alliance" with Chrysler Corporation, LLC to jointly develop platforms, engines, etc and GM wouldn't have to take them over. They could get most of the benefits without any real exposure and it would better serve both companies than an all out-take over, no?

[Xenon]

Still it seems like a relationship that GM would be doing all the heavy work (developing platforms) while Chrysler sits back and watches. But if that Phoenix engine lineup is better than the HF family, it could work. But wouldn't that turn Chrysler into a unofficial GM division?

[nadepalma]

Still it seems like a relationship that GM would be doing all the heavy work (developing platforms) while Chrysler sits back and watches. But if that Phoenix engine lineup is better than the HF family, it could work. But wouldn't that turn Chrysler into a unofficial GM division?

I dont think that it would be GM doing all the work for nothing. I'm sure that GM would take the lead, but Chrysler still has to pitch in half the money for any engine/technology/platform development or pay GM a royalty for the use of them. Either way its not like GM doens't get anything out of it and it will help spread out the costs.

[joemac]

If GM really, truly wanted to merge with someone, it should be a bus manufacturing company.
With the advent of a green movement, it would behoove GM to jump back on the bandwagon of mass transit.

Don't they sort of already do that?

http://www.autobloggreen.com/2008/01...us-this-month/

[mgescuro]

What I was driving at was, this article makes it seem as though Cerberus' REAL aim behind giving Chrysler to GM is to get GM's 49% stake in GMAC so they can merge it with Chrysler Financial. I say that instead of forcing GM to merge with Chrysler, why not just invite GM to keep their 49% stake in GMAC and merge Chrysler Financial anyway? That will create a better finance company, GM can keep their (now diluted) stake in the new company and it would avoid forcing GM and Chrysler to merge.

Well that makes more sense.
The only problem I see with that is the severe overlap on the automobile side. There are tremendous redundancies in product development and engineering, not to mention plants and union workers.

I mean, you're essentially looking at a 60-70% layoff of Chrysler personnel if something like this were to take place. GM would have no choice but to eliminate the Chrysler redundancies.

What does Chrysler offer GM that GM doesn't already have? The LX platform? Well, with Sigma, Zeta, and "Zigma" around, why have LX? The RT platform?
Essentially, what you get from Chrysler are the names and a few average cars at best... and the Viper.

[CBECK]

I think Cerberus just lost one of its heads.

I take it your talking about the three headed monster guarding the gates to/outta hell? That's awesome. It seems like this is where everything is headed doesn't it?

[mgescuro]

I take it your talking about the three headed monster guarding the gates to/outta hell? That's awesome. It seems like this is where everything is headed doesn't it?

Yup. 3-headed dog guarding Hades.
I was trying to be punny.... and semi-succeeding I think...

[Orbit Orange]

Maybe I'm oversimplifying this but, why doesn't GM just SELL the other 49% of GMAC to Cerebus for another 14 billion like they did with the first 51%? Is it that Cerebus doesn't have the cash to do so? Why then couldn't Cerebus just look for another buyer for Chrysler (Asian or Indian more than likely)? GM doesn't need another lead weight around it's neck, it already has several. 14 billion could give GM the needed cash for 14 months at their current rate of cash burn. Again maybe I'm oversimplifying this or don't have all the facts but a merger is a huge mistake. Someone in another thread likened it to the Titanic lashing itself to the Andrea Doria and that is a good analogy. Let the Doria sink on it's own, sell off the dead weight on the ship, then use that cash to fix the gaping rent in the bulkheads. Sounds simple enough.

[PhishPhood]

IMO the only benefit to GM acquiring Chrysler vehicle manufacturing is that GM could/should eliminate a good sized competitor. At the least fpr a while it would control a bigger share of the market. But it would be non-sensical to try to rationalize the Chrysler products into the GM family. There's nothing that Chrysler has that GM needs.

The problem with this and I'm sure it's the reason that GM will decline the offer is that GM would be paying multi-Billions of dollars for air. Let's say that GM gets to buy the Chrysler operations for $3 Billion. GM with its share and Chrysler's share would have nominal control of 30-35% of the US market. This is not a bad thing...if GM were able to keep every Chrysler customer. They could do this by keeping the same shrinking Chrysler product lineup with all its redundencies with GM products or they could try to convince the loyal Chrysler faithful to give up their vehicles and come over to the GM side.

'Yes we know that you liked your Mopar products and yes we bought them and shut down the entire operation because our GM products were better but you should still come on over to the GM side. Why? Because we own you too now. We bought the Chrysler lineup because we wanted you the Chrysler faithful to buy GM products.'

It's very unlikely that this would occur. The more likely result would be that GM would pay some multi-Billion dollar payment, get the Chrylser business and watch it continue to shrink and shrink and defect and shrink and defect back until GM was it's original size before the purchase.

In effect it would have paid Cerebus $3 or $4 Billion for nothing. The main beneficiaries would be GM's competitors...who paid Cerebus nothing.

[Clownzilla]

Maybe I'm oversimplifying this but, why doesn't GM just SELL the other 49% of GMAC to Cerebus for another 14 billion like they did with the first 51%? Is it that Cerebus doesn't have the cash to do so? Why then couldn't Cerebus just look for another buyer for Chrysler (Asian or Indian more than likely)? GM doesn't need another lead weight around it's neck, it already has several. 14 billion could give GM the needed cash for 14 months at their current rate of cash burn. Again maybe I'm oversimplifying this or don't have all the facts but a merger is a huge mistake. Someone in another thread likened it to the Titanic lashing itself to the Andrea Doria and that is a good analogy. Let the Doria sink on it's own, sell off the dead weight on the ship, then use that cash to fix the gaping rent in the bulkheads. Sounds simple enough.

Nobody want's Chrysler......even Cerebus. That's why they are trying to sucker GM into buying it. I think Chrysler could still be a good deal if handled right...........emphasizing IF!

[drew770]

Nobody want's Chrysler......even Cerebus. That's why they are trying to sucker GM into buying it. I think Chrysler could still be a good deal if handled right...........emphasizing IF!

This is a sad situation Chrysler finds itself. A company at no one wants to buy and craptastic vehicles to go with it.

Chrysler should have refuse to merge with Mercedes back in the day because they were stronger back then.