Under the Hood of a GM-Chrysler Merger

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If Cerberus can merge GMAC and Chrysler Financial, they could save millions in back-office costs. In the long run, the merged financial company could boost margins. Since Chrysler Financial doesn't have mortgage operations and had limited exposure to its leasing, its total portfolio has fewer problems. With cost savings and Chrysler Financial's stronger balance sheet, the combined lender might be able to raise more capital for loans.

GMAC recently told dealers that it will only loan money for car buyers with credit scores of more than 700, which means nonprime and subprime borrowers must go elsewhere. GM has even offered its dealers incentives to get those buyers financed with banks and other lending sources.

Funding Shortage

GMAC's problem is that the finance company doesn't have enough funds to do much more than give dealers financing to buy cars from GM and make loans to prime-credit buyers.

So merging the two finance companies could be a way to save money, fix the problems at both, and raise their credit ratings.

For GM's part, the company would have an even smaller stake in the lender that it relies upon for car loans. But company executives say privately that Cerberus already controls GMAC and can call the shots with its 51% ownership stake.

Getting synergies from merging two financiers is easy to see, but it would be much tougher for GM to make Chrysler work, says Maryann Keller, an auto industry consultant who sits on the boards of rental-car company Dollar/Thrifty (DTG) and dealer Lithia Motors (LAD).

Too Sprawling?

Keller and other critics of the deal say that GM would have its hands full trying to consolidate product lines and close plants. Plus, the merged automaker would have more than 10,000 dealers—far more than it needs for the roughly 5 million cars the combined company would sell every year in the U.S.

GM would also have to deal with the incredible complexity of designing cars and marketing for 11 different brands. Dumping any one of them means getting rid of the dealers who have invested in franchises to sell those brands.

Plus, Chrysler may need more repairs. Sales are down 30% this year and analysts say the company has a dearth of new product coming. "Just looking at the future of Chrysler's product lineup, there's very little of any significance in the near term," says Eric Noble, president of The CarLab, an auto industry consulting firm in Orange, Calif.

Labor Concerns

Then there's the union. United Auto Workers President Ron Gettelfinger has already said he doesn't favor any merger that means cutting more jobs. Unless GM decides to keep every Chrysler product line and all of the workers and factories who make them—which would negate the reason for doing the deal in the first place—management would have to negotiate painful cuts with the UAW and buy out workers. In the past few years, GM has bought out thousands of workers at a cost of about $100,000 each.

It could do the same with Chrysler's workers. But they are younger and may not be ready to take an early-retirement package. The union has so far not accepted mandatory buyouts.

GM would have an even tougher time cutting brands and managing such a big and complex company. And that's another reason the company hasn't cut a deal yet. This would create a giant. GM doesn't want to create a behemoth that takes a long fall.

Welch is BusinessWeek's Detroit bureau chief.