The big winner in a GM-Chrysler merger

Posted by: David Welch on October 21, 2008

Who’s the real winner if a General Motors-Chrysler merger goes down? Well, it won’t be the United Auto Workers, who stand to lose jobs when GM combines product lines and shutters plants. Ditto for the Michigan economy and white-collar folk at Chrysler.

Not many think GM will be a winner, either. General Motors thinks it will get cash and revenue by acquiring Chrysler. Then, GM management thinks, they can restructure the company and make that revenue stream profitable. Of course, GM has to successfully restructure Chrysler and not burn the better part of Chrysler’s $11 billion doing so. That’s a lot of headaches for the top of the house at GM.

But let’s look at who really benefits from this deal. It’s Chrysler’s owner, Cerberus Capital Management, and its bankers, of course. Under one proposal, first revealed in BusinessWeek online in this story on Oct. 17, GM takes over Chrysler’s auto business and Cerberus keeps a minority stake in the combined company. Then Cerberus, which owns Chrysler Financial Services and 51% of GMAC Financial Services (GM owns the rest) merges the two lenders. GM keeps a minority stake.

So think about this. Cerberus would get to own a minority stake in a larger carmaker with a much more stable future than Chrysler. Yes, GM has a world of problems. But its size, global presence and technology make it a player for the long term if it can weather the current storm. Chrysler can’t make it on its own. That’s why the company may soon change hands for the third time in a decade. Cerberus would get to relinquish the tough task of fixing an American car company, which obviously is no easy task. Since GM is public, Cerberus also has a liquid stock that can be sold on the open market, assuming GM gets its house in order and the stock price rises.

Cerberus also gets the majority stake in a large financial company. The merged GMAC and Chrysler Financial could slash back office staff and boost profitability. Once GMAC’s ResCap mortgage unit clears up its bad loans, the combined lender could be a real money maker. And Cerberus would have the reigns.

The other entity that makes out in this is J.P. Morgan Chase, which holds about $10 billion in Chrysler debt. I’m sure it would rather see GM as the new borrower of record than Chrysler. So you see, this deal isn’t as crazy as many analysts have said, if you’re one of the Wall Street firms at the table.

Reader Comments

Luke Simons

October 21, 2008 8:47 PM

I live in Michigan and my opinion is that GM should do what it has to do to survive.

luke simmons

October 22, 2008 1:00 PM

I would love to see the consolidation take place - even though in the first few years the outcome would not be pretty. But later (assuming I would still have a job) I would be proud to survive instead of going under without action!

Tom Paine

October 22, 2008 1:51 PM

Ah--I see now! In exchange for letting Cerberus slide out of its ownership of Chrysler and take over all of GMAC, GM gets employees it does not need, factories it does not, dealers it does not need, car models it does not need, management distractions it does not need and some cash that, at its current rate of burn, will be gone pretty fast. What's not to like? It sounds a lot more like a rescue of Cerberus than the salvation of GM. Toxic.

HECTOR CASTILLA

October 28, 2008 2:15 AM

GM/CRYSLER SOUNDS GOOD. HOW ABOUT FORD JUMPING ON BOARD. I PREDICTED THE MERGER OF THE FIRTS TWO. MONTHS BEFORE IT BECOME PUBLIC.MANAGED PROPERLY AND BUILT EXCLUSIBLY IN USA BY AMERICANS IT COULD BE THE BOOST WE ALL NEED TO GET OUT OF GIVING UOR MONEY AND JOBS TO OTHER WORLD CITIZENS

m.r.

October 28, 2008 8:29 AM

the merger may go through but dont expect an instant good report. indeed, if it is successfull, which I doubt,(certainly not in the short term), the new board should insist on new management at the top! the record will show that top management at both firms failed to make good profit and growth!
why should they be trusted now to lead the merged new company? caveat investorus!

Mike

October 29, 2008 11:15 AM

Ont he consolidation my opinion is that GM should do what it has to do to survive. In my industry Car Insurance it all trickles down, so of course I want the car makers to do good.

Nick

October 29, 2008 4:55 PM

I don't see how it works. Everything I have read, the money Chrysler brings to the table will be used to buy out workers and dealers. GM does not need more name plates, factories, dealers or employees. The combined compnay would have about 10,000 dealers and 11 name plates to sell before they buy anyone out or drop vehicle lines. I don't know how many factories and employees would be closed or put out of work. Chrysler should fold into Renault/Nissan since Nissan and Chrysler are already doing deals. GM - not sure what I would do with it, other than give it loan guarantees to weather the economic storm.

ebony

November 12, 2008 10:32 AM

hi g,m chysler

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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