The Beginning of the End: GM-Chrysler Merger Talks Resume

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December 18, 2008

The US Congress failed to pass the $14 billion US auto industry bailout legislation last week after consensus could not be reached with Senate Republican who wanted tougher restrictions placed on the auto companies and additional concession from the auto workers labor union (UAW). With General Motors (GM) and Chrysler LLC in need of immediate cash, the fate of both companies now rests in the hands of the Bush administration. To prevent the collapse of the industry and the possible cascading affect it could have on the already troubled US economy, the President has agreed to aid the companies with financial assistance. Under the Troubled Asset Relief Program (TARP) intended to bailout troubled banks, the President has the authority to direct funds to GM and Chrysler. The most recent information indicated the administration would like to have the finance package in place by December 25th.

Secretary of the Treasury, Hank Paulson was quoted as saying:

"The automakers will get the money as quickly as we can prudently do it …We need to do this, but we need to do it right.”

Financial assistance appears to be on its way in some form yet it is uncertain as to when. However, the troubles continue for the industry. Just yesterday Chrysler announced production at all production locations will cease at the end of this week to align inventory with demand. The shutdown affects 30 plants, including all general assembly, powertrain, component and stamping operations. The actions affect 46,000 workers in the United States, Canada and Mexico.

The press release stated:

Due to the continued lack of consumer credit for the American car buyer and the resulting dramatic impact it has had on overall industry sales in the United States, Chrysler LLC announced that it will make significant adjustments to the production schedules of its manufacturing operations. In doing so, the Company will keep production and dealer inventory aligned with U.S. market demand. In response, the Company confirmed that all Chrysler manufacturing operations will be idled at the end of the shift Friday, Dec. 19, and impacted employees will not return to work any sooner than Monday, Jan. 19, 2009.

As recently as last week, GM also announced significant cut backs in production and plans to remove approximately 250,000 vehicles in the first quarter of 2009.

General Motors announced today a significant reduction of planned production for the first quarter of 2009 due to the ongoing and severe drop in industry sales, which were down 36 percent in November overall and 41 percent for GM (2007 vs. 2008). The impact of these and recently announced actions to adjust production with market demand, will result in the temporary idling of approximately 30 percent of GM's North American assembly plant volume during the first quarter of 2009 and will remove approximately 250,000 units from production.

The speed and severity of the U.S. auto market's decline has been unprecedented in recent weeks as consumers reel from the collapse of the financial markets and the resulting lack of credit for vehicle financing.

At current sales rates, GM and Chrysler are sitting on 130 and 117 days worth of inventory according to Automotive New estimates. The industry average is 110 days with an industry accepted target of about 60-70 days. As I have stressed in the past, the sales collapse has adversely affected the whole industry with all the major manufacturers planning production cuts. However, these moves by both GM and Chrysler are also intended to preserve liquidity as they wait for Federal financial assistance. At this time they do not have the cash cushion to continue to spend money to produce product.

GM-Chrysler Merger Talks Back On

In light of the above, the Wall Street Journal is reporting today the GM-Chrysler merger talks are on again:

General Motors Corp. and Chrysler LLC have reopened merger talks, as Chrysler owner Cerberus Capital Management LP has signaled its willingness to give away part of its ownership in the auto maker, say people familiar with the discussions.”

As expected, GM has denied the talks. In any case I have been anticipating this development as a condition for Federal aid if formaly or informally sanctioned by the government. (The Senate Auto Industry Bailout Hearing - Round II).

This comes on the heels of GMAC, the finance unit co-owned by GM and Chrysler’s parent Cerberus, being on the cusp of raising the necessary capital to become a bank holding company. That will allow the company to tap directly into the $700 billion TARP funds and provide adequate liquidity for cars loans and mortgages.

More importantly, if the report is true, this should seal the fate of Chrysler and allow for the restructuring of the US auto industry to formally take place once the deal is settled.

President George Bush has stated in the context of the US economic recession:

"On the other hand, I'm mindful of not putting good money after bad …So we're working through options."

As I have been saying for some time, investing money in Chrysler is ill-advised. Given the current state of the industry, saving GM should be the administrations top priority. A GM-Chrysler deal will allow that to happen as the liquidation of Chrysler can be managed by GM. At this time, any Federal aid allocated to Chrysler is “putting good money” into a company that likely cannot be saved in today’s economic climate. With no product in development and about 40% of its staff leaving last month, the company is a shell with insufficient resources to continue.  I have been personally told from within the company the lights are already out for all practical purposes.

If GMAC can raise the funds to attain bank holding status as it appears it may, Chrysler Finance can then be merged into the company, paving the way for Cerberus’ exit strategy from automotive.

I have expected for some time now that any Federal aid to GM would be contingent on Chrysler fate and Cerberus' political connections (Chrysler's Hidden Coffers, Forbes 2008). If a merger/absorption is consummated, this will make it more palatable for the next congress and administration to provide the funding and framework to allow GM the means to conduct the restructuring it has not been able to do in the past in order for it to become a viable automotive manufacturer in the US. In other words, to do it right.

Additional reports on the GM-Chrysler Merger Talks:

Chrysler, GM Reopen Merger Talks, Fox News, 2008

GM, Chrysler Re-Start Talks Over Merger, WSJ Says (Update1), Bloomberg, 2008

GM reportedly denies Chrysler deal talks, Market Watch, 2008


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