MORE HEREAnalysts skeptical of rumors about an auto-giants merger
Move would likely mean major cuts
October 12, 2008
A merger of General Motors Corp. and Chrysler LLC could save billions of dollars but would surely mean dramatic job cuts, especially in metro Detroit where duplicated operations likely would face elimination, 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 also is a sign that Chrysler's fate is yet 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 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, a person familiar with situation said Saturday that GM officials had approached Ford in recent weeks about joining forces, but Ford decided to remain independent.
Naysayers weigh in
There's plenty of skepticism and caution about the risk.
"Big automotive mergers generally have not been successful," said David Healy, an industry analyst with Burnham Securities.
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 said a potential deal hinges on GM -- which has already 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%, add 3,500 dealerships to its network and create duplication of products -- all of which would likely fall beneath the corporate knife.
This year has been tough for the already embattled Detroit automakers. U.S. car and truck sales are down almost 13% across the industry, with Chrysler's sales down 25% and GM's down 17.8%. Chrysler and GM are losing money, and both companies have felt it necessary to issue statements this year saying 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, who is an expert in reorganization and management of troubled companies. "I think you could find after the integration billions of dollars of cost savings."
"I don't see it as a good thing," said one UAW leader, who asked not to be identified because of his elected rank in the union. "It would mean massive plant closures and a loss of jobs from top to bottom."
Already, GM has reduced its workforce by more than 19,000 workers since February 2007.
Cerberus, which owns 51% of GM's finance arm GMAC, has reportedly proposed a swap in which GM would get Chrysler's auto business and 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. ... I don't understand why GM would want to get rid of GMAC right before the government rescue."
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.