Monday, October 13, 2008

GM-Chrysler Merger Won't Fix Problems, May Add More

Oct. 13 (Bloomberg) -- General Motors Corp. and Chrysler LLC probably wouldn't solve their financial problems with a merger or partnership, and combining the money-losing automakers might make matters worse, analysts said.

``There is just a tremendous amount of overlap,'' said Michael Robinet, an analyst at consulting firm CSM Worldwide Inc. in Northville, Michigan. ``If they agreed on an alliance or merger today, any real benefits would be years off. This is not going to be an overnight success.''

They may not have time. With cash draining away and a shared dependence on fuel-thirsty trucks, GM and Chrysler are trying to revive sales just as U.S. auto demand sinks to a 17- year low. GM, the biggest U.S. automaker, might be dragged down even quicker with losses from No. 3 Chrysler, Robinet said.

GM rose today in New York trading even as industry analysts questioned the rationale of a GM-Chrysler combination after the companies' preliminary discussions about a merger or alliance. The talks were confirmed by five people with direct knowledge.

GM's board was cool toward the idea of acquiring Chrysler from parent Cerberus Capital Management LP, the Wall Street Journal reported. While the discussions were broken off because of the credit crisis, they could be revived, the newspaper said, citing people familiar with the matter.

Nardelli's View

``I can tell you that we have approached and have been approached by third parties who are interested in exploring future possibilities with Chrysler,'' Chief Executive Officer Robert Nardelli said in an e-mail to employees today without referring to talks with Detroit-based GM. Spokesmen for Cerberus and the automakers have declined to comment.

Deutsche Bank analyst Rod Lache estimated that a combined company might produce $6 billion in savings while still failing to assure ``long-term health.''

``In our view, it is unlikely that the combined entity would be able to maintain 11 distinct brands and roughly 30 percent market share,'' Lache, who is based in New York, wrote in a note today.

GM gained $1.52, or 31 percent, to $6.41 at 12:09 p.m. in New York Stock Exchange composite trading, joining a marketwide rally in the U.S. The shares tumbled 80 percent this year 2008 before today, the most of any of the 30 companies in the Dow Jones Industrial Average.

Other than long-term savings from meshing administrative functions and vehicle development, it's difficult to see why GM would contemplate a merger with Chrysler, Robinet said.

Should Cerberus shed Chrysler, GM would still have to assume or pay off the balance on $7 billion in loans the private-equity firm took out to capitalize the automaker a year ago.

`Redundant Bodies'

``I don't think you could cut enough redundant bodies to stanch the cash burn,'' said Joe Phillippi, an analyst with Auto Trends Consulting in Short Hills, New Jersey.

Standard & Poor's said today that its non-investment grade ratings on GM and Chrysler are unchanged because it's ``skeptical'' that a tie-up would improve liquidity in 2009, when both companies may have to raise more funds to pay bills.

A merged GM-Chrysler would widen the gap over Ford Motor Co., the second-largest U.S. automaker and cement GM's hold on the global sales lead over Toyota Motor Corp. It also would unite companies with a common bloodline. Buick chief Walter Chrysler left GM in 1919 to form his namesake company.

History has shown that auto-industry tie-ups frequently falter. Germany's Daimler AG paid $36 billion for Auburn Hills, Michigan-based Chrysler in 1998 and sold it to Cerberus last year in exchange for a $7.4 billion investment in the automaker, in which the German company retained a 19.9 percent stake.

GM and Daewoo

Even acquisitions that succeed, such as GM's $251 million purchase of South Korea's former Daewoo Motor Co. in 2002, take years to work.

GM's eight U.S. brands are Chevrolet, GMC, Pontiac, Buick, Cadillac, Saturn, Saab and Hummer, which is targeted for disposal this year. Chrysler sells autos with its own badge and under the Dodge and Jeep nameplates.

More than half of both companies' sales are light trucks, a segment that slumped 21 percent in the U.S. through September on record fuel prices. The credit crisis squeezed buyers last month, when GM's domestic sales slid 18 percent and Chrysler's dropped 25 percent.

Merging GM and Chrysler would create a dealership base of about 10,000, defying the automakers' efforts to thin those ranks to ensure that the survivors remain profitable.

`Very Expensive'

``Do you really need Dodge when you have Chevrolet?'' said analyst Erich Merkle of consulting firm Crowe Horwath LLP in Oak Brook, Illinois. ``It's very expensive to close dealerships, and these companies don't need new expenses in this economy.''

Instead of a merger, a partnership between GM and Chrysler such as sharing an engine plant, combining purchasing or expanding existing ties on hybrid, gasoline-electric engines may make more sense, said Phillippi, the Auto Trends analyst.

Such an arrangement would follow a pattern already established by Chrysler, which has agreed to build a pickup truck for Nissan Motor Co. in exchange for a Nissan-built subcompact.

Still, the savings and revenue from that kind of accord likely wouldn't meet the needs of Chrysler or GM, which says it's burning through cash at a rate of $3.5 billion a quarter.

GM has lost $69.8 billion since its last annual profit, in 2004, and its cash and marketable securities slid 12 percent to $20.7 billion at the end of June from March 31. The company is trying to free up $15 billion by the end of 2009 by paring expenses, selling assets and possibly borrowing money.

Chrysler, which isn't required to disclose financial data, posted $515 million in first-quarter losses and has said it won't profit in 2008. Cash totaled $11.7 billion through June, with about $2.3 billion restricted, Chrysler said. Chrysler plans to sell $1 billion in assets this year and has announced 28,500 job cuts since February 2007.

``This is not a natural fit for these companies,'' CSM's Robinet said.

To contact the reporter on this story: Mike Ramsey in Southfield, Michigan, at

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