GM-Chrysler merger talks advance
October 18, 2008: 1:41 PM ET
DETROIT (AP) -- In the doomsday scenario raising anxiety around the
Motor City, General Motors Corp. makes a deal for Chrysler, keeps Jeep
and the minivans, and vaporizes the rest of the company.
Tens of thousands of Chrysler's 66,409 employees lose their jobs as
cash-desperate GM swiftly cuts redundant operations and sheds
unprofitable models. Factories and dealerships are closed, and the
lights go out at Chrysler's gleaming corporate headquarters campus in
the northern suburb of Auburn Hills.
It's not something Andre Thibodeaux wants to think about. The general
manager of Lelli's, an upscale steakhouse and Italian restaurant near
Chrysler's 15-story tower, gets about half his lunch business from the
automaker and related businesses.
The eatery, with roots in downtown Detroit and family owned for three
generations, already has lost business as Chrysler and parts suppliers
have downsized and people eat out less due to economic worries. The loss
of Chrysler's corporate headquarters is almost unthinkable.
"I can't imagine moving the building or changing or selling or anything
like that," said Thibodeaux. "Auburn Hills in general is built all
around that building."
Although it may be unimaginable, industry analysts say GM (GM, Fortune
500) would have no choice but to slash costs if it acquires struggling
Chrysler from its current owner, New York private equity firm Cerberus
Both sides have been talking for months, but the pace recently has
increased. Cerberus wants out of the auto business, and as the credit
markets have dried up, GM, worried about running too low on cash before
the U.S. auto market rebounds, wants Chrysler's currency stockpile.
A person familiar with the negotiations said Friday that the talks have
advanced to the point where top executives of both companies have looked
at a deal and asked for refinements. The person spoke on condition of
anonymity because the talks are secret.
Deal still a long way off
In August, Chrysler said it had accumulated $11.7 billion in cash and
marketable securities as of June 30. That figure remains around $11
billion, the person said, despite Chrysler's U.S. sales being down 25
percent through September, the largest decline of any major automaker.
Detroit-based GM is burning up more than $1 billion per month, with
several analysts predicting it will reach its minimum operating cash
level of $14 billion sometime next year. GM's sales are down 18 percent,
and the company has lost $57.5 billion in the past 18 months, although
much of that comes from noncash tax accounting changes.
Chrysler's money pile would help solve GM's cash problem if credit
Both automakers have had to deny bankruptcy rumors in recent weeks,
saying people who won't buy cars from a company that looks like it could
go out of business.
According to the person familiar with the negotiations, the deal being
discussed thus far calls for Cerberus to hand over Chrysler in exchange
for GM's 49 percent stake in GMAC Financial Services. GM sold a 51
percent stake in its finance arm to Cerberus in 2006.
Cerberus also would get an equity stake in GM, hoping to get a good
return should GM recover when U.S. auto sales bounce back from a serious
Other automakers, including the allied companies of Renault and Nissan
Motor (NSANY), also are in discussions about Chrysler, the person said.
Simultaneously, Cerberus, which bought 80.1 percent of Chrysler from
Daimler (DAI) in a $7.4 billion deal last year, is negotiating to
acquire Daimler's 19.9 percent stake.
GM and Cerberus are still a long way from a deal, according to the
person, and GM's board reportedly is cool to the idea.
All that GM, Chrysler and Cerberus have said about the negotiations is
that automakers meet all the time. Chrysler Chief Executive Bob Nardelli
said Thursday the auto sales drop has created an environment that favors
The upside of a Detroit Two
It's the uncertainty of consolidation that worries many in Michigan,
which has lost more than 400,000 jobs since 2000. Its unemployment rate
in September was 8.7 percent, the highest in the nation, as GM, Chrysler
and Ford (F, Fortune 500) continued to make cuts.
"Mergers usually represent job loss," Gov. Jennifer Granholm said Friday
on the Public Broadcasting Service's Nightly Business Report. "We are
fearful that a merger would mean more job loss, and that is the last
thing we need."
Among the fearful are Chrysler workers and its roughly 3,600 dealers,
who already are under pressure from the company to merge with other
dealers and scale back their ranks.
"If you end up going from the Detroit Three to the Detroit Two, you
don't need as many dealers representing those nameplates," said Dale
Early, owner of a Chrysler-Jeep dealer in the Houston suburb of
Kingwood, Texas. "With the market the way it is today, you don't
necessarily have a need for three major manufacturers," he said.
The upside of an acquisition, industry analysts say, is that it would
almost certainly shrink the U.S. auto industry to where it needs to be
so the survivors can thrive. Many analysts are predicting that the U.S.
auto market will shrink to sales of about 13 million vehicles this year.
That's a drop of about 3 million from 2007, and the decline is more than
Toyota's (TM) U.S. sales last year.