Sunday, October 12, 2008

How is a GM/Chrysler merger smart?

by Jay McDonough, Progressive Politics Examiner

There's news today that embattled auto manufacturers, General Motors and Chrysler, are in preliminary talks to merge the two corporations.

The talks between G.M. and Cerberus Capital Management, the private equity firm that owns Chrysler, began more than a month ago, and the negotiations are not certain to produce a deal. Two people close to the process said the chances of a merger were “50-50” as of Friday and would most likely still take weeks to work out.

Speculation about a possible bankruptcy filing by G.M. has mounted in recent weeks because of the automaker’s dwindling cash reserves. The automaker had $21 billion in cash on hand at the end of the second quarter, but it was burning through more than $1 billion a month.

The credit rating firm Standard & Poor’s put G.M. on negative credit watch on Thursday.

Look, I understand why the management of GM and Chrysler want a merger; it's a classic way to cut costs by eliminating redundancies and leveraging the two corporations assets.

But there are two rather large negatives here as well. One will be the resultant, and obvious, lay offs that occur as the joint company takes advantage of the economies of scale coming from the merger. It's pretty bad timing to add big numbers to the unemployed rosters as the economy is sinking because individuals and businesses are unable to borrow money.

The larger issue is the resultant size of the merged entity. We already have too many corporations considered "too big to fail" (including GM and Chrysler!). Each time one of these corporations begins to teeter, U.S. taxpayers money has to flood in and save them, as the results of letting them fail are too devastating to the economy. How is combining two "too big to fail" companies that are already teetering and merging them into an even bigger "too big to fail" megacorporation (that will, no doubt, be teetering) a smart move?

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