Jeremiah 29:11

GM/Chrysler Merger May be Off; Other Auto Mergers are Possible

Posted: Oct. 21, 2008 11:10 a.m.

The widely rumored merger of General Motors and Chrysler may not happen, according to several press reports this morning, because GM may not be able to raise the cash it would need to complete the deal. But that doesn't mean Chrysler will survive as a separate company. According to several reports, the company may be looking for other merger partners.

The Detroit News reports that officials from Cerberus, Chrysler's current owner, are "pushing for a rapid deal before both automakers are weakened further in this treacherous environment," and GM officials "also want to conclude an agreement quickly."

However, MarketWatch reports, "General Motors Corp., with its cash pile increasingly depleted, reportedly hasn't yet been able to secure the necessary funding to close a merger deal with rival automaker Chrysler LLC. That could put a damper on the companies' goal to close a transaction before the Nov. 4 presidential election." Both companies have "been pitching the deal to investors, citing anticipated cost savings of up to $10 billion, an immediate boost in revenue and increased cash availability to the combined firm," but "the marriage would require outside funding for expected cost-cutting measures," and GM has been unable to find a funding source.

Motor Trend explains that, in any merger, GM would be "responsible for severance packages and other restructuring costs, requiring a major outlay of cash cash the General can't afford to part with right now. Normally a company in this position might borrow money to absorb the short term costs, given that this merger is supposed to be profitable in the long run. However both Standard & Poor and Fitch Ratings have ruled GM's credit to be at a noninvestment, or junk, grade, making it nearly impossible to sell bonds without paying an interest rate above 20%. Considering the automaker is currently burning through $1 billion a month, that cost would simply be too much."

The lender of last resort in the U.S., of course, is the Federal Reserve. While the Fed would have been reluctant to involve itself in such an industry deal directly in the past, some have speculated that the current economic climate could change that. 24/7 Wall Street speculates, "It would make sense for the two auto firms to turn to the Fed. There is plenty of money there. The circumstances are extraordinary. An entire pillar of America's industrial base is at risk." But federal financing of the merger might lead to the perception that the government aided in laying off Chrysler's workforce which could make the government reluctant to intervene.

If GM can't raise the cash, other possible merger partners may be waiting in the wings to snap up both companies.

The Wall Street Journal reports, "Cerberus Capital Management LP, Chrysler's majority owner, is discussing having Nissan, and possibly Renault, acquire a minority stake in Chrysler," according to "people familiar with the matter." However, "a sale of the Auburn Hills, Mich., company to General Motors Corp. is still its preferred path."

GM could, in theory, also find another partner. 24/7 Wall Street notes, "There are probably only two car companies in the world large enough to have a merger of equals with GM or to buy the company outright. One is Toyota (TM), which certainly has the balance sheet and operating prowess to do. But, it already has 15% of the US market and is growing." It has little need to buy GM. "The other operator who has the revenue, manufacturing scope, and worldwide sales to pick up GM is VW. It has next to no market share in the US and its exposure is mostly in Europe and Asia. Since it could take tremendous costs out of GM's administration and production operations, it could cut North American costs substantially and be well positioned for a recovery. GM needs a home, and VW is big enough."

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GM/Chrysler Merger May be Off; Other Auto Mergers are Possible

Posted: Oct. 21, 2008 11:10 a.m.

The Date of this article is 3 weeks old.