GM Plus Chrysler Equals Survival?

The automakers may try to salvage one healthy company out of two sick ones

By David Kiley and David Welch

General Motors (GM) and Chrysler have had discussions about merging operations amid widespread speculation that neither can survive the current global economic meltdown in the financial markets, according to executives at both companies who spoke on condition of anonymity. The talks were reported on the Web sites of The Wall Street Journal and The New York Times late Friday, Oct. 10, the same day GM issued a statement denying that it's considering Chapter 11 protection.

GM shares have been trading at 50-year lows this week as credit rating agencies Standard & Poor's (MHP) and Fitch Ratings both issued reports expressing concern that GM and Ford Motor (F) won't have enough cash to last through 2009 if sales continue to fall. Since Chrysler is privately held, information available about its true financial condition is not known.

At the end of the second quarter, GM was going through $1 billion of its cash reserves a month after reporting a $15.5 billion quarterly loss. That burn rate is believed to have accelerated as consumers have found it difficult to get loans for new cars amid the credit crunch, leading GM to raise its cash-back incentives. GM will report third-quarter earnings later this month.

Waiting for a Breather

The executives who confirmed the talks between GM and Chrysler said negotiations, which began in August, have been tabled until the financial markets calm down. "Talks will pick up again," said one high-ranking executive. The Dow Jones industrial average lost almost 20% last week, its worst week in history. GM lost 46% of its market value last week, closing at $4.89 on the New York Stock Exchange on Oct. 10.

The stock price isn't the only worrisome measure of Detroit's woes. The automakers' bond prices and bank debt have been trading at deeply discounted levels on fears that one or more of the companies won't survive. Most GM and Ford bonds trade at 30¢ to 50¢ on the dollar. Chrysler bank debt trades at around 30¢ on the dollar.

The motivation for a GM-Chrysler merger? Large-scale cost savings. One GM executive who spoke on condition of anonymity said the automaker and Chrysler could get rid of massive overhead and boost profits for the remaining company. The companies would cut thousands of white-collar jobs and factories. The cost savings GM is looking at would also help get a deal financed, said the executive.

Ripe for Consolidation

GM would find even greater savings, the executive added, with a partner like Ford, since both companies have global operations they could combine. But he declined to say that GM is in talks with Ford. GM management on the whole thinks the industry is ripe for consolidation. Gary Dilts, senior vice-president at automotive consultant J.D. Power & Associates, agrees. "I'd be surprised if we didn't see consolidation by the next calendar year."

Getting there would be incredibly difficult. Two GM executives familiar with the talks say there's no certainty that a merger will happen. But even if there's no GM-Chrysler deal, it's clear that GM's top management is at least open to more dramatic options than simply restructuring their business. "This is about massive cost reduction," says one GM executive, who added: "No deal comes without risk." Indeed, it won't be easy to make sense of the two companies at a time when liquid assets are so short for both.

Skeptics don't see a merger between troubled Detroit companies as a panacea. John Casesa, a partner at auto-industry consulting firm Casesa Shapiro, likened a GM-Chrysler deal to the ill-fated mergers of the 1950s, when companies like Hudson and Nash merged, or Packard and Studebaker. These marriages of marginal players didn't result in long-term survival.

A Freefall in Truck Sales

GM and Chrysler could easily cut billions in costs, Casesa says. "They would have one set of pickup truck engineers, one for minivans and crossover sport-utility vehicles, one group for marketing or accounting, and so on…. But that's the easy part." The bigger challenge, says Casesa, is holding on to the revenue of both companies. Each is struggling to brake a freefall in truck sales, Casesa says, and merging won't end the shared struggle to lure customers into showrooms.

"GM would be a lot better off if Chrysler just went away," said one industry analyst who consults with GM, who spoke on condition of anonymity because of the sensitivity of the discussions. "A whole lot of loyal Dodge, Chrysler, and Jeep buyers—the ones who are left—would turn to GM as well as Ford if they had to change brands," said the consultant. "But if you buy the idea that GM basically has to eliminate brands, and therefore a lot of that sales volume, they lose some of that scale and have the headaches and costs of winding down Chrysler on top of that," he adds.