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General Chrysler Motors?

18th October 2008

The Wall Street Journal, among many publications, recently reported that General Motors is in talks with Cerberus Capital Management about acquiring Chrysler.  Apparently, the deal would give GM at least a controlling interest in Chrysler and Cerberus would get the 49% of GMAC that they currently do not own.  Separately, but surely not unrelated, Cerberus has been talking to Daimler about acquiring the 19% of Chrysler that Daimler kept when they sold the majority to Cerberus.  The talks apparently have been put on hold due to the recent and continuing turmoil in the equity and credit markets.

This news falls squarely in the category of bad.  Bad for Chrysler.  Bad for GM.  Bad for GM shareholders.  Bad for dealers.  Bad for employees of both companies, especially Chrysler’s.  The only party that stands to gain, in my humble opinion, is Cerberus.  They are in way over their heads with Chrysler.  They thought they could teach Detroit a thing or 10 when they bought Chrysler.  Apply some outside thinking to the auto industry.  They assembled a dream team to run the place and thought that they could turn Chrysler around and quickly made a few (billion) bucks.  The fact that they are talking, apparently seriously, with GM shows that they have realized that they made a big mistake and are eager to get out before they lose their fancy French-cuffed shirts.

When a company takes over another, there are usually benefits that accrue to the buyer.  The only benefits that GM would get by acquiring Chrysler are the Jeep brand and minivans.  Jeep would make a nice complement to Hummer, which is being shopped around.  Other than those, I defy anybody to tell me what GM gets in this deal.  Other than a huge headache.  It is widely thought that GM has too many brands, dealers, plants and employees – all of which will be exasperated by acquiring Chrysler.

So what is motivating GM, which evidence to the contrary, has lots of smart people in charge?

  • First, a misguided attempt at economies of scale.  This is laughable, as anybody with a brain would see that neither GM or Chrysler is presently able to sell even near what they can produce.  The costs involved in buying out the union members whose plants would surely close will be ridiculous.  Why would they need to buy out the union?  If they don’t, the union strikes all of the plants and that spells doomsday.
  • Second, an equally misguided attempt to control the “market” for Chrysler.  GM would rather swallow a poison pill like this than see another company get a foothold in the US market.  Another company, like Nissan/Renault, might be interested and actually get some economies and synergies with Chrysler.  That makes for a more formidable competitor.  This is like the old adage of cutting off your nose to spite your face.  The companies formerly known as the Big 3 have along history of this.  Ford is widely thought to have purposely signed a very generous UAW contract in the early 1990s so they could stick it to GM.  Henry Ford II is also known to have been interested in buying Chrysler around 1980 just so he could fire Lee Iaccoca – again.
  • Third, Chrysler reportedly has $11.7 billion on hand.  GM is strapped for cash, and maybe they think that the cash alone is worth the headaches.  Maybe, but GM is having trouble enough making sense of its own far-flung operations.  In addition, they will go through that money like a hot knife through butter.  Closing plants, buying out employees – both salaried and hourly, and buying out dealerships costs a LOT of money.  Easily in the billions with a B.  Before you tell me that they could just starve the dealerships of product or just let them die, think for a minute.  Every state has very strict franchise laws that protect the dealers from that very idea.  Even if they could just let them die, that would take years to sort out.  Years that GM simply doesn’t have.  Giving GM more money is a little like giving Matt Millen more draft picks.
  • The only benefit to GM would be the ability to add Chrysler products to GM factories, thus raising capacity utilization.  That, however, would take many years to combine cycle plans into 1.  Again, years GM simply doesn’t have

So what’s going on here?  Hard to say.  Some reports have said that GM’s bankers have been putting pressure on GM to make this deal.  Maybe they think they are more likely to get paid with the $11.7 billion.  However, because of the buyouts, plant closing, etc that GM will have to make, that $11.7 billion won’t last very long.

I say good luck to GM, and I hope they know something that the rest of us don’t because this sure looks like an awful move on their part.

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