GM, Chrysler Talking Merger

October 11, 2008
General Motors and Chrysler have held discussions over the past month to merge the two companies, the New York Times and the Wall Street Journal reported late Friday evening.

The Journal says the deal would likely involve a swap of Chrysler assets held by Cerberus Capital Management, for the remainder of GM's finance arm GMAC that Cerberus does not already hold--49 percent of GMAC's shares.

The possibility of a merger is on hold because of the stock market's gyrations, the papers add, but a deal could be rejoined quickly if the markets stabilize.

A merger between GM and Chrysler would lead to radical, and permanent, changes in the U.S. automotive landscape. The companies have more than 100 factories and 11 brands, not to mention thousands of dealers, that would have to be rationalized to make money out of the merger. Other sources estimate GM could net $10 billion in savings out of a potential merger--but that would only happen after drastic cuts to the number of models the companies make, plants they operate, and people they employ.

Both sources suggest Cerberus would end up taking an unnamed share in the combined GM-Chrysler.

The Times says a deal between the two is "50-50" and could take weeks to finalize. This week, GM has repeatedly denied it's considering a bankruptcy filing as its stock shares have been slammed, falling from $43 a share as a recent high to $4 a share this week.

As for Chrysler, it's been a continual source of speculation this year, as Cerberus--which owns an 80 percent stake in the company--faces another year of large sales drops. The Times reports Chrysler's parent has been hoarding cash that would otherwise have been spent developing new models, making it more certain that some kind of deal must be struck to give Chrysler a shot at survival. At the recent Paris auto show, sources suggested that Cerberus' recent moves to acquire the rest of Chrysler from Daimler AG would make it easier to package the company for a quick fire sale--something it's unable to do if it does not own the company outright.

Chrysler has also been exploring deeper alliances with Renault/Nissan. It has engaged that alliance to build a new small car for Chrysler--basically a rebadged Nissan Versa--while Chrysler provides Nissan with a next-generation Titan pickup spun from its Ram truck. The synergies from a Chrysler-Renault/Nissan deal, on paper, are far more uncomplicated than with GM. Chrysler's expertise in trucks, minivans and SUVs would have little overlap with Nissan's luxury, performance, and small cars.

However, pressing financial concerns and the U.S. political season, not to mention the common Cerberus ties, could make a GM-Chrysler deal far more palatable. A merger between the companies may sail through federal approval, since GM and Chrysler's market shares are hitting historic lows. GM controls 22 percent of the U.S. market, while Chrysler holds 11 percent. Rival Ford Motor Company has hovered around 13 to 15 percent in 2008, with a downward trend. A deal would also ensure GM remains the world's largest automaker, outgunning Toyota and controlling 35 percent of the U.S. market for new light vehicles.

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