GM needs cash, not Chrysler
October 31, 2008 - 2:49 pm ET
General Motors doesn't need Chrysler to survive. It needs cash reserves.
GM must pay attention if it wants to make a deal to survive.
And U.S. Treasury officials halting negotiations with GM is a clear sign. It says: nobody outside the executive suites of GM and Chrysler majority owner Cerberus Capital Management thinks giving GM $10 billion to dismantle Chrysler and fire tens of thousands of people is a good idea. Maybe there's a better approach.
For the moment, ignore the logic of the deal and consider a basic premise of deal making: What does the other party want?
GM has been shopping this idea around all fall. It has sought funding everywhere. Every source of capital -- banks, private equity, dealmakers, the UAW, Detroit employee pension funds -- said no. That leaves the federal government.
Hey, GM brass must have reasoned, Treasury has $700 billion. If we slip this in before the Nov. 4 election, maybe they'll go for it.
Yes, the Bush administration does have $700 billion. But what is Treasury's mandate?
To stimulate economic recovery.
The view from Washington
From Washington's viewpoint, here's GM's pitch: Give us $10 billion. We'll buy and kill a national icon, fire 30,000 or 40,000 people directly, and dump dealers in every Congressional district in the country. We and Cerberus get healthy and the total job loss would be under 200,000.
Wow, the Treasury guys must have said, what a fabulous way to jump start the economy. Then they said what every other potential investor has so far: We pass.
When you keep pitching a deal and people always say no, maybe the deal is the problem.
And this one is mystifying.
It's easy to understand GM is burning cash. GM, like Ford and Chrysler, sold a lot of assets to build a rainy-day fund. Now it needs a monsoon fund. We all get it.
But why does Chrysler have to die for GM to live?
Both GM and Chrysler have too many brands, too many dealers and a shrinking market share. From the outside, the primary attraction for GM is Chrysler's presumed $11 billion cash hoard.
But even if that exists, the upfront cash costs of laying off tens of thousands of employees, compensating suppliers for aborted parts contracts and buying out dealers pretty much uses up any Chrysler cash hoard.
The deal smells of desperation.
It's like a bad movie. Two cowboys surrounded by wolves are running out of ammo. One says, "What's our plan?" The other says, "I'm gonna shoot you, pick your pockets, throw your body to the wolves and run." Quite a likeable character, huh?
Suppose GM finds the cash to close this deal. Then what? Who will buy a vehicle from Chrysler's killer? Will GM executives be focused on recovery, or bogged down in the details of butchering Chrysler's corpse?
GM's current credit rating doesn't help either. If GM and finance arm GMAC can't find funding to make secured loans to car buyers with better-than-average credit, who wants to fund this deal instead?
Back to my original point: GM needs cash. Treasury has some.
Why not be honest?
How about this GM pitch: We need cash. We slashed costs and sold everything to raise cash for this storm, but the energy spike and credit crunch is worse than we expected. We can stand alone by 2010 but we need more cash to get there. Your $10 billion can save hundreds of thousands of U.S. jobs.
The feds might buy that one.
That wouldn't save Chrysler. But Cerberus executives said they knew what they were getting into when they bought 80 percent of Chrysler last year. It's time for them to knuckle up to being in the auto business.