GM-Chrysler Deal To Save $10 Billion -- From Where?
October 17, 2008

By Bill Visnic

DETROIT -- Late yesterday, a number of media outlets reported General Motors Corp. and Chrysler LLC were "accelerating merger discussions" and suddenly have identified a reputed $10 billion in "cost synergies" (one-time? annual?) a merger would generate.

Ten billion is a very round, very large and very convenient number. And a number that is highly dubious. From whence would that plump $10 billion come?

• Labor? Last time we checked, UAW rank and file numbers have been cut to the bone, two-tier wages have been instituted (meaning new hires now start at something more approaching Third World wages than support-a-middle-class-family pay) and the acceleration of scheduled plant closings already is well under way.

The only way to realize huge cost savings from labor is to shed more bodies. And both companies already are doing that in a big way; merging doesn't improve the situation -- or change the equation.

• Product-development? Hardly. While there's certainly some overlap that could be chopped or made more efficient, the very fact the two companies would have to deal with combined product-development organizations leaves one to wonder how merging makes it easier to streamline the whole package.

Many engineers insist both companies' product-development and engineering sections already are running lean. It's difficult to imagine combining the two -- then determining how to "synergize" it all -- would deliver much in the way of true savings. Much less a significant chunk of that big, hairy $10 billion media reports say GM is gloating about.

• Component prices? That dog definitely won't hunt.

The supplier base already has been ravaged by years of relentless cost-cutting from the automakers. Supplier bankruptcies, at every tier, remain practically a daily occurrence, and listing the names of suppliers that have gone bankrupt in the last three years would create a list the proverbial length of one's arm.

There's nothing left to get from suppliers, and anybody suggesting GM and Chrysler's combined volumes would drive some sort of fantastic new cost-saving economies of scale are naïve. The same volume from one company instead of two does not change the cost equation in any meaningful way, nor does the notion that different components used by both companies could be commonized to save giant sums of money.

• Dealership cutting and consolidation? Please.

We can already hear the franchise lawyers zipping their leather portfolios and rubbing their hands at the prospect. Unless the merged company is somehow able to legally void dealer agreements -- and establishing that precedent surely wouldn't come cheaply -- our prediction for any plan of wholesale dealer reduction, to quote Mr. T: "Pain."

• Chrysler's $11-billion "cash hoard?"

This war chest has become the equivalent of the Lucky Charms pot at the end of the rainbow. Has anybody seen it? Has anybody verified it? Maybe GM accountants have. But if it exists, wouldn't Cerberus be figuring out a way to soak it up before handing over the keys to Chrysler? And if it exists, why did the company draw on a $2 billion credit line in June -- to incur some "smart" debt?

Quick and easy pronouncements of immediate cost savings from "synergies" between a merged GM and Chrysler sound like nothing more than a repeat of the justifications given for the "merger" of Daimler and Chrysler. That merger, it should be remembered, produced not savings but the eventual decimation of the valuation of both companies.

In effect, if this $10 billion fruit is hanging so low for a potentially merged GM and Chrysler, why isn't at least a significant portion of it attainable by them individually? And if a merger is required to "save" this kind of dough, wouldn't they have merged long before their backs were pressed this hard to the wall?

Media reports say the merger deal is being pressed by Wall Street interests, largely Cerberus Capital Management LLC, which owns 81.1 percent of Chrysler, and J.P. Morgan Chase and Co., which, it seems, happens to be on the hook for reams of GM and Chrysler paper. No surprise, then, those interests are pushing any plan that might stave off something more drastic -- and investment-bashing.

Given the performance of these entities in other big-picture financial maneuvers -- i.e. the subprime mortgage adventure -- their motivations and judgment in this matter should come under extreme suspicion.

Perhaps the GM board -- reputedly still "cool" to the merger idea -- will realize this and resist being talked into a bad play by bankers and hedge funds that haven't even begun counting their bailout money from the mortgage fiasco. These wizards did not understand their own business, so nobody should be enlisting their counsel about auto manufacturing.

Posted by Michelle Krebs at 4:34 AM under Business , Chrysler , Commentary , Featured , GM | Comments (5) | digg this | Seed Newsvine

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