Sunday, October 19, 2008

Under the Hood of a GM-Chrysler Merger

BusinessWeek has learned details of the proposed merger between GM and Chrysler. The rewards are huge—but so are the obstacles
By David Welch

As top executives at General Motors (GM) and Chrysler owner Cerberus Capital Management continue to talk about a merger, the most popular scenario at this point would still have all three companies joined at the hip.

Talks between the two companies continue, and while a deal is far from certain, the two sides are narrowing in on a merger structure that both think could work, BusinessWeek has learned. The basic outcome has GM folding Chrysler's auto business into its own while Cerberus would merge lending arm Chrysler Financial Services and GMAC Financial Services. Cerberus owns 51% of GMAC while GM owns the rest.

If that deal goes through, GM would end up owning a minority piece of the merged finance company and Cerberus would still have a stake in GM. While many analysts have figured that Cerberus would retreat from the car business, the private equity firm would remain deeply in the game. If the deal ends up working this way, every company involved has a vested interest in seeing the other succeed. It would still behoove Cerberus to run the combined lender so that it helps sell more GM and Chrysler cars.

Such a deal would give GM the chunk of revenue from Chrysler's estimated 1.4 million customers and the $11 billion in cash on Chrysler's books. Meanwhile, Cerberus would acquire the merged lending business it has wanted since it acquired Chrysler from Daimler (, 5/14/07) more than a year ago.

A Win-Win
Sources close to both companies say that if the two lenders and two automakers are combined, all would have better balance sheets. Then they can weather the storm and get to 2010, when executives on both sides think a new health-care deal with the United Auto Workers will save money, and auto sales will rebound from today's dismal levels.

But there are many hurdles to getting a deal done and making the synergies work. Both sides need to agree on what the traded assets are worth. Even if they do, there are issues to be worked out with the unions, who will be fearful of massive layoffs. One source close to the talks says that GM Chairman and CEO G. Richard Wagoner Jr. is keen on the merger but is moving very cautiously. He does not want to forge such an historic tieup if the risk of failure is too great.

The merged car company would have a dizzying 11 brands to manage and more than 10 million vehicles in global sales a year with automotive revenue of roughly $220 billion.

GM executives think they can benefit from Chrysler's cash and revenue, while cutting thousands of headquarters jobs and overhead to create a profitable revenue stream. One source close to the talks said that GM "will save billions at the start and many billions more in the future" if they do the deal.

Clock Is Ticking
But with both companies burning cash, they will have to race to get those savings. "The classic merger arguments don't apply because they don't have the time to realize them," says Sean McAlinden, chief economist at the Center for Automotive Research in Ann Arbor, Mich. "If the recession is as deep as everyone thinks, GM could run out of cash next year."

As for the combined lending company, in the past GM has rebuffed the idea of merging them for fear of diluting the company's ownership in GMAC. When Cerberus bought Chrysler from former parent Daimler (DAI) in May 2007, the private equity giant had to carve Chrysler Financial out from Daimler's lending operation and rebuild some of the back-office and loan-approval operations......Rest Of The Report
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