Why GM Is Serious About Buying Chrysler

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The principle would be similar with an acquisition of Chrysler. The deal would add a huge chunk of revenue to GM, and, if merged smoothly, there would be additional cash flow and profits to help fund its huge retiree health-care liabilities. GM would also inherit the $22.6 billion in health-care liabilities that come with Chrysler's 98,200 retirees. But the logic is that Chrysler has 1.4 retirees for every worker and GM has 3.8 pensioners per staffer. So the added cash flow from a leaner, meaner Chrysler would make it easier to fund both liabilities. Both companies have overfunded pension plans.

But if the deal is so promising, why not just do it?

Execution Challenges

First, GM sees logic for the acquisition on paper. But getting it to work will be incredibly complex and will come with its own set of challenges. "It only makes sense to the extent that GM could keep the sales," Casesa says. "To keep the sales, you have to have strong product." Chrysler doesn't, at the moment. GM would have to jump in and try to bolster the vehicle lineup.

Then, says Casesa, GM would have to sprint to seize the benefits of absorbing Chrysler. "You'd have major overlap," Casesa says. "You'd have to move fast and take overhead out very quickly."

The biggest hurdle will be the United Auto Workers union. Stallkamp, the former Chrysler executive who is now a partner with the private equity firm Ripplewood Holdings, says that the two companies would have to consolidate plants—especially those that make trucks and sport-utility vehicles—to make a merger pay off. That might mean big job cuts, and they would come after the UAW has already made big concessions to GM, Chrysler, and Ford (F) this year and last. The union has agreed to cut more than 85,400 jobs at the Big Three through buyouts and early retirement deals.

Says Stallkamp: "It would require a huge deal with the UAW." The union could quash any deal by refusing to go along with it and threatening to strike.

Expensive Buyouts

GM would also get Chrysler's bloated dealer system. Chrysler has already said it needs fewer than the 3,400 dealers it has. But getting rid of them is expensive.

GM wouldn't need many of those dealers, Casesa says. "There's a Chrysler dealer across the street from every GM dealer," he says. But state franchise laws make it difficult to get rid of them. So GM would have to buy them out. GM paid well over $1 billion to get rid of Oldsmobile a few years ago, and a big chunk of the cost came from buying out dealers.

That means that however the deal is done, it has to be a very cheap purchase for GM, because the company will need cash to fix many of the problems. Daimler paid $38 billion for the company, and even though management is eager to relieve pressure from shareholders and unload it, selling Chrysler at a fire-sale price will be an embarrassment for the Germans.

Other Possible Bidders

There is also the possibility that GM could be outbid by another player. Renault-Nissan (NSANY) is an obvious choice. Its chief executive, the aggressive Carlos Ghosn, has the cash to acquire and the desire to add a North American leg to his French-Japanese alliance. Chrysler would give him the minivan and truck presence he needs, plus the Jeep brand.

A source in the Daimler camp says that there are several interested parties. News reports from Europe say Korean automaker Hyundai is keen to make a bid. So Zetsche may have many options besides GM.

In any case, it's looking more and more like Chrysler's nine-year marriage to Daimler is headed for divorce. Says San Fillippo: "Given the state of the industry, you have to expect the unexpected." Anyone interested in a Buick 300?

Welch is BusinessWeek's Detroit bureau chief.