GM-Chrysler: No Move Is Smart Move
October 13, 2008

AutoObserver Staff

DETROIT -- It appears cooler heads prevailed at General Motors long before the media frenzy over a possible merger between GM and Chrysler started. Wisely.

The Wall Street Journal is reporting Monday that GM's directors "gave a cool reception" to the idea of acquiring Chrysler's automotive business when it was discussed at last week's board meeting.

The board's reception is the right one, in our view, as there's little in such a deal for either of them, especially for GM.

The Journal confirmed the story broken by The New York Times over the weekend which led to a media feeding frenzy that GM recently held talks with Chrysler's majority owner -- private-equity firm Cerberus Capital Management LP. Cerberus proposed swapping its 81.1 percent stake in Chrysler for GM's 49 percent stake in home and auto lending firm GMAC. Cerberus owns the other 51 percent of GMAC. The paper further reports talks between the two automakers have broken off for now, but could be revived.

If GM survives the cash burn -- and that will be no easy task -- its longer-term prospects are strong.

GM has done a good job in building a foundation for the company of the future, though apart from cash burn, it has some challenges ahead. Chrysler is in a far weaker position.

GM's global footprint is solid, particularly in Latin America and China. Chrysler has virtually none, and though it has vowed to build a global footprint, it's rather late to the party.

Another seemingly crazy bet at the time -- purchasing South Korea's Daewoo -- is paying off for GM. Daewood makes and distributes small cars sold as Buicks and Chevys around the globe. And then there's Chevy itself, which is emerging as a fast-growing global brand.

But that's not all. Other reasons why we see GM's affiliation with Chrysler as ill-advised:

• The two companies are not stronger together; two weak companies merged do not make a strong one. Both companies are being dragged down by most of the same problems -- problems only made larger by joining: too much workforce, too much capacity, too many dealers, too many brands and models misaligned with demand.
 
• And speaking of demand -- it stinks for everybody. Joining up amounts to two companies unable to generate enough revenue individually to cover costs and are unable to generate even more revenue to cover their joined costs.
 
• And what about "corporate culture?" A full-blown joined-at-the-hip relationship means tons of redundant exec jobs (and exec pay), engineers, designers, staff people, say nothing of workers in the plants. How many big-buck vice presidents, "division" leaders, marketing honchos, all that, would General Chrysler need?

And which company has the best talent in which positions? We've seen this movie before; it was called DaimlerChrysler. And we know how it ends. All of the "synergies," economies of scale and such that looked so good on paper when the "merger" was proposed a decade ago never materialized.

• Dealers. Both GM and Chrysler have for years been trying to pare their dealer ranks -- no easy task with the nation's tough franchise laws. Only now is there some movement in weeding out dealers due to plummeting real estate prices and the downturn in vehicle sales. How would merging GM's already too-numerous Chevrolet, Cadillac, Pontiac, GMC, Buick, Saturn and Hummer dealers with Chrysler's Dodge, Jeep and Chrysler help either company? Were they to embark on ditching some franchises as GM did to Oldsmobile, they'd be paying legal bills for years to come. 

• Product: Chrysler brings virtually nothing to the party: minivans, if that segment stabilizes; Jeep, though Chrysler and the market's shift in buying preference have devalued it; and maybe the new LY platform for the next Chrysler 300. The Ram is totally new -- but big deal. Like GM needs more trucks and SUVs.
 
• Technology: We know GM has technology. Its two-mode hybrids and upcoming Volt are just a couple of strong examples. But does Chrysler have technology? Its new advanced-technology group, ENVI, exists, but few outsiders have had much contact, causing us to suspect little genuine activity.

Chrysler surprised recently by hauling out a trio of electric vehicles, but it felt like little more than a PR stunt to show Washington Chrysler was doing something so Congress would approve a $25 billion high-tech loan for the auto industry. Plus, details of partnerships and such for the vehicles were vague, as Chrysler employed the "we're a private company and we don't have to tell you anything" dodge yet again. 

Chrysler's engines and transmissions are sub par (except for the once-dominating Hemi, but who needs another V8?). GM is light-years ahead of Chrysler's powertrains.

• What about the real estate? Who needs that giant Chrysler headquarters and tech center with GM's sprawling tech operations and downtown Detroit headquarters -- which GM happens to be trying to refinance for cash through Detroit's pensions funds? Unloading property when real estate prices are in the tank would mean certain losses.

Reasons GM should consider an affiliation with Chrysler, beyond GM management performing its fiduciary duties to explore all options in these troubled times, are few; the payoffs for any of the reasons wouldn't come easily, quickly or inexpensively:

• Cash: Perhaps there's a way for GM to gain cash to the deal but the hedge fund business isn't what it used to be when Cerberus bought into Chrysler. There remains the possibility, perhaps, for some token cash payment from Cerberus.

• Jeep. Though its value is diminished, Jeep is a  recognized icon and its global reach has not been expanded to its potential.

• Cleaning house. A merger would be an excuse to make giant cutbacks in plant capacity and the labor roles, effectively voiding GM and Chrysler's barely year-old UAW contracts. But surely legal expenses would increase in the short term, thus offsetting any positive cashflow eventually generated.

• Competition reduced. GM taking over Chrysler would eliminate a longstanding competitor. The current roiled environment means GM effectively could absorb the portions of Chrysler it wants with zero cash outlay -- if there's consolidating to be done, the opportunity couldn't be more ripe: "acquiring" Chrysler could cost GM nothing in actual dollars.

• Manufacturing advantages. GM could cherrypick the best of its own and Chrysler plants. But the cost to weed out the dregs would be excruciating in dollar and human terms.

Somebody likes at least the talk of a GM-Chrysler linkup -- or GM acquisition. At the end of Monday, GM's stock closed at $6.60, a thunderous 35 percent one-day gain.

Posted by Michelle Krebs at 9:10 AM under Chrysler , Commentary , Featured , GM | Comments (1) | digg this | Seed Newsvine

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