Merger Talks in Detroit Auto Business

by Marta Kowalczyk November 2 2008, 18:36

I. Introduction

Since September, General Motors ("GM") and Chrysler's majority owner, Cerberus Capital Management have been in talks over the possibility of acquiring Chrysler. [1] Both companies are facing a financial crisis as both have suffered huge losses during this economic recession. [2] Moody's Investor Service stressed that GM would run out of operating cash next year without new sources of capital. [3] GM sees its merger with Chrysler as its bailout providing the company with revenue, cash flow, and cash reserves to make it through the coming year. [4] Merger talks have dealt with GM acquisition of Chrysler's auto business and Cerberus merger with lender Chrysler Financial Services and GM's ownership of GMAC Financial Services. [5] However, the question remains: how beneficial will the GM-Chrysler merger be to these companies. In this article, the advantages and disadvantages of the merger will be discussed.

II. Merger, Lifeline for GM and Chrysler?

One clear implication from the merger is profit for the combined entity. GM and Chrysler look at this merger as a lifeline from their spiraling financial crisis. Chrysler's debt trades at around 30 cents on the dollar. [6] Furthermore, Chrysler has witnessed a 25% drop in its sales. [7] As for GM, the company has already lost $18.8 billion in the first six months of the year and still has not reported its third-quarter losses. [8] The consolidated entity would benefit from Chrysler's $62 billion in revenue, 1.5 million customers and $11 billion in cash. [9] This money could be used to fund some of the drastic cost-cutting to occur at Chrysler. [10] This new company would produce approximately $250 billion in annual revenue with the advantage of owning more than 30 % of the U.S. market. [11] Thus, it would improve the companies' credit rating and lower the risk that either company would have to seek bankruptcy over the next 15 months. [12]

Also, the merger has the potential for savings for GM providing GM with much needed funds. [13] These savings by GM are in purchasing and raw material costs. [14] They also include "technology savings from merging powertrain and clean technology platforms as well as corporate overlaps in engineering, marketing, distribution and advertise[ment]." [15]

In addition, GM would have access to Chrysler's products, including the successful Jeep brand and minivan lineup. [16] Furthermore, Chrysler's joint ventures, such as its deals with China's Automobile Co. and Volkswagen AG, would be accessible to GM. [17]

III. Financing Hurdles and Dealings with the UAW

However, there are major setbacks to the merger of these two companies. Most importantly, thousands of employees may be laid off as a result of the merger. The Anderson Economic Group of East Central Lansing has estimated that this merger may cause between 25,000 to 35,000 layoffs. [18] The former Chrysler executive Thomas Stallkamp stated that it would be necessary for Chrysler and GM to consolidate plants during a merger in order for the merger to be successful. [19] Consolidation means big job cuts. It will be difficult convincing the United Auto Workers Union ("UAW") to these job cuts, especially since the Union had already agreed to 85,400 job cuts at GM, Chrysler, and Ford in exchange for buyouts and early retirement deals. [20] UAW President Ron Gettelfinger has already stated that he does not favor any merger that includes more layoffs. [21] The Union can threaten to strike if they do not support this merger. [22] Says Stallkamp, "It would require a huge deal with the UAW." [23]

In addition, GM may be unable to secure financing necessary for its acquisition of Chrysler. [24] GM had recently approached the U.S. Treasury for funding of $10 billion to support the new merger in exchange for taking an ownership stake in the combined company. [25] However, the Treasury Department has  stated that it is not negotiating direct aid for the merger. [26] As of right now talks about the merger are on hold until after the Nov. 4th election as both parties hope to secure loans with the new administration. [27]

Furthermore, GM may be "over their heads" in trying to consolidate the two companies. The merged automaker would have over 10,000 dealers. [28] This is far more dealers than it needs for the amount of cars the combined company would sell. [29] Also, GM would have to design and market cars for 11 different brands. [30] Dealers have invested in franchises to sell these brands. If GM decides to discontinue any of these brands, dealers may file suit in an effort to try to recoup their investment in franchises. [31]

IV. Conclusion

GM and Chrysler should merge.  Both companies are at the brink of bankruptcy. This merger would bring needed revenue back in into the companies, producing approximately $250 billion annually. [32] Although the merger will result in job cuts as both companies attempt to consolidate, the loss of jobs would be inevitable if GM and Chrysler do not merge and continue on their downward financial spiral towards bankruptcy.  Thus, a merger appears to be a much needed lifeline for both companies. However, the merger could fall through if GM is unable to secure financing from the new administration for the merger. As a result, the success of the merger is uncertain.

[1] David Kiley and David Welch, Why do GM and Chrysler Need Uncle Sam's Help?, Bus. Wk., Oct. 28, 2009, http://www.businessweek.com/bwdaily/dnflash/content/oct2008/db20081028_614954_page_2.htm.

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.

[7] Jui Charkravorty Das and Kevin Krolicki, GM Chrysler Merger Talks on Hold After Aid Hopes Fade, USA Today, Oct. 31, 2008, http://www.usatoday.com/money/autos/2008-10-31-gm-chrysler-talks-stall_N.htm.

[8] Kiley and Welch, supra note 1.

[9] David Welch, Under the Hood of a GM-Chrysler Merger, Bus. Wk., Oct. 17, 2008, http://www.businessweek.com/bwdaily/dnflash/content/oct2008/db20081017_939535.htm[hereinafter Welch, Under the Hood].

[10] John D. Stoll and Jeffrey McCracken, GM lacks Investors to Fund Deal with Chrysler, Wall St. J., Oct. 20, 2008.

[11] Id.

[12] Id.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] Id.

[18] GM-Chrysler: Financing Dilemma, CNN, Oct. 29, 2008, http://money.cnn.com/2008/10/29/news/companies/gm_chrysler.ap/.

[19] David Welch, Why GM is Serious about Buying Chrysler, Bus. Wk., Feb. 18, 2007, http://www.businessweek.com/bwdaily/dnflash/content/feb2007/db20070218_013874.htm[hereinafter David Welch, Why GM is Serious].

[20] Id.

[21] Welch, Under the Hood, supra note 9.

[22] Welch, Why GM is Serious, supra note 19.

[23] Id.

[24] Charkravorty and Krolicki, supra note 7.

[25] Id.

[26] Id.

[27] Id.

[28]Welch, Under the Hood, supra note 9.

[29] Id.

[30] Id.

[31] David Welch, GM's Latest Retooling the Chrysler MergerBus. Wk., Oct. 30, 2008, http://www.businessweek.com/bwdaily/dnflash/content/oct2008/db20081029_522058.htm.

[32] Stoll and McCracken, supra note 10.

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