General Motors is on the brink of a financial disaster. It’s managed to keep out of the abyss through asset sales, hocking the company store, and yes, cost cutting. CEO Rick Wagoner’s “plan” might have worked had the economic winds blown more favorably. But they didn’t. The automaker is months away from a liquidity meltdown. Everyone who supplies GM knows it. The rating agencies know it. And yes, Rick Wagoner knows it. GM has to secure new funding or face a bankruptcy judge in Lower Manhattan. So now let’s talk about Chrysler…
Chrysler Motors LLC is owned by private equity fund Cerberus (save a small chunk retained by Daimler). Since purchasing the automaker, Chrysler has amassed an $11b cash trove. In the main, they assembled their hoard by not spending any money on capital expenditure, R&D, engineering or other necessary essentials to carry on as a car company—to the point where the product well is dry.
No surprise there. Cerberus’ real goal in all this: merge GMAC and Chrysler Financial into a global finance company and exit from manufacturing. It believed that Chrysler Motors could survive with rehash of its existing products and as a distributor of other OEMs’ products for a while– until it could find some sucker to buy it.
Like everyone else, Cerberus never expected the meltdown in the auto or credit markets either. So now the Hades Dog is stuck with a manufacturer with no future. And it still has all the liabilities. A Chapter filing would wipe clean Cerberus’ equity investment; maybe five billion dollars gone. So why not follow GM to the federal bailout trough and wait for better days?
Simply put, it’s not politically feasible to provide loan guarantees to a company owned by private equity. First, it would rescue “Wall Street” guys who pay themselves millions of dollars year. Steve Feinberg’s net worth might still be measured in the billions. Second, even if loan guarantees were provided, Chrysler is nothing more than a shell of company anyways. It would be good money after bad.
Meanwhile, GM needs cash STAT. Washington’s printing press already faces a meltdown, as a voters’ bailout fatigue threatens a political backlash. Given the private equity angle, the feds would look to save GM (and Ford) but let Chrysler go.
Only that won’t work either. It’s simply not equitable to have the government make those kind of decisions when voters (e.g. the UAW, suppliers, dealers, etc.) involved with Chrysler are spread across almost all political districts. Imagine the phones ringing in Congressional offices. Washington would be in a bind– save Steve Feinberg and take the wrath of voters everywhere, or let Chrysler go and just save GM and hear about the inequity of the “playing favorites.”
The best case – and this is how it’s playing out – is to let GM “absorb” Chrysler Motors and give Cerberus an equity piece in GM. No doubt, Cerberus will take a writedown, but something is better than nothing. OR – trade Chrysler Motors for the rest of GMAC. Hmmm. Either way, both Cerberus and GM come out ahead. In theory, the new GM controls 30 percent of US auto sales in market share, 50k more workers (soon to be eliminated but we’re not going to tell anyone), additional plants, and 3k more dealers. But most importantly, it has a larger political footprint.
And so GM will acquire Chrysler. A deal that has nothing to do with synergies, cost savings or parts sharing. Nope, it’s all about guaranteeing that Washington saddles-up to the loan giveaway bar for Detroit. Billions and billions of dollars for guarantees or direct loans, all paid for the American taxpayers– who buy more than 50 percent of cars from foreign auto makers. All justified in saving a great American icon of industrial might, a driver of new automotive technology (Volt anyone?) and preserving jobs in the heartland.
But you won’t hear the truth from the auto execs at GM, or analysts or the automotive scribes. Wall Street will celebrate the deal (deal fees in a lackluster M&A market). The automotive media will herald the “bold stroke of genius” and “the next 100 years of GM” or something to that effect, and the auto execs will point to synergies, efficiencies, and other BS.
Everyone else will simply ask WTF? And we just told you the truth: it’s a deal designed to absolutely, positively insure that Washington provides a massive bailout to GM in early 2009. (Ford will follow along on the gravy train too… but that’s another story.)
So there it is – the real reason this deal will go down. Washington will have to rescue GM now, it has no choice. The private equity guys are out of the picture (and off the hook for Chrysler’s liabilities too). The political dilemma solved. Could you script a better scenario?
Ugh…This mess makes me want to dig up my Rage Against the Machine CDs.
I don’t think it’s going to happen. Call it a hunch, but antitrust regulation may come into play. Emphasis on may. I think Chrysler will be sold to the Renault/Nissan alliance, and things will come full circle since Chrysler purchased AMC from Renault in the ’80s (correct me if I’m wrong in any of this.). A Dodge-branded Clio and Megane sounds good in my book…
thats’ why I love this site. you tell it like it is. hard to get the straight story many places these days. keep up the great work of The Truth.
Sorry but I don’t see even a remote chance of this taking place.
GM does not want to ‘absorb’ the pension and medical costs that Chrysler has, nor the overwhelming majority of their product line-up which directly competes against the General for the most part.
I could see a buyout with an overseas entity that is subsidized by their government… which would be essential given Chrysler’s debt load and the dire need to invest tens of billions into R&D. The only real opportunity within Chrysler Motors is the knowledge and ‘job base’ it would give to a foreign firm that has an enormous amount of surplus, highly skilled labor.
Yep… that would more than likely be a Chinese firm.
I like this site for telling the truth too.
But I don’t think this scenario is feasible.
Just FYI, Rick Wagoner will preside over the retirements of the Buick, Pontiac, GMC, Saab and Saturn brands before you’ll stop that dachshund from hunting. A hound with a towel wrapped around it is still a hound.
The press accounts that I’ve read imply that Cerberus is actively shopping Chrysler, not just to GM but to others as well.
That makes sense. For Cerberus, the issue at this point is one of recovering their capital. They basically got Chrysler for free, and the money sitting on Chrysler’s books is their own purchase cash. Selling now allows them to exit with minimal losses.
For GM, the only reason for them to want this is to be too big to fail. I would suggest that if being too big to fail assures their rescue that they are already too big to fail right now. They don’t need Chrysler for this.
In my opinion, discussions about UAW liabilities often miss the boat. Those obligations are going to be continually negotiated away and whittled down. If there is a bankruptcy filing, they will be crammed down and reduced substantially. The union has no negotiation leverage whatsoever and is screwed, regardless of what happens. The only questions now are how screwed they are, and when do they truly know what the screwing looks like.
Just FYI, Rick Wagoner will preside over the retirements of the Buick, Pontiac, GMC, Saab and Saturn brands before you’ll stop that dachshund from hunting. A hound with a towel wrapped around it is still a hound.
It would make more sense to sell some of those brands to raise cash (except for GMC, that one can die), but what do I know, I don’t run GM…
Ferrarimanf355: No one is running GM, except perhaps into the ground. As Bugs Bunny would have said, “What a bunch of maroons!”
It would make more sense to sell some of those brands to raise cash
The brands have something close to zero value. If anything, their value may be negative. Having a Pontiac badge on a car is more of a liability than an asset. You’ll be having a sale in an empty store.
In total, GM’s market share could have value, but the brands individually are pretty much worthless, with the possible exception of Hummer, which is ironically the best brand of the lot.
It would make more sense to sell some of those brands to raise cash (except for GMC, that one can die), but what do I know, I don’t run GM…
Either way, Rick Wagoner damn sure isn’t going to do it.
Oh, and I forgot Hummer. Then again, hasn’t everyone?
Pch101,
Hey, it’s worth a shot…
Hey, it’s worth a shot
What are they going to do, put Chevy on E-bay? And what happens when word gets out that they wanted to sell it and there were no takers?
Nobody would want these GM brands. Honestly, it really isn’t worth a shot.
Returning to the “too big to fail” issue, the parties that may most want this merger are the banks that are owed money by the existing Chrysler. They don’t want Chrysler to file 11 and wipe out what they’re owed, so they would like to see their obligations pushed over to someone else who might use them to their advantage.
This has me absolutely aghast. No one from a sound business standpoint could imagine this making any sense. Sorta like Sears and Kmart merging (oh, crap, that did happen), or BOA buying Merril Lynch, when it couldn’t run its own version 2 years earlier (and that happened, too). More sickness doesn’t make either of the businesses healthier.
But, Ken, you are clearly right. This has nothing to do with logic. Is has to do with the “cover” of an election that is weeks away. A lame duck president and administration that is flailing away trying to fix things so its legacy isn’t pure sh*t. And no politician with the guts to stop or even control the bail out madness, now that they’ve already given away, what a trillion dollars in total.
Heck, the $10’s of billions GM-Chrysler would want will seem like chump change. And the Unions, regardless of who is elected, will pounce on the next president and administration to “save the industry.” And the leadership (sic) of this new company will say its “un-American” to not help this new emerging auto power-house.
Madness!
Well, an absorption is one possibility, I guess.
I think you’re overthinking it, Ken. It would be such a stupid decision on GM’s part.
Uhhh…which is precisely why I think there’s a good chance it may happen.
Okay, now my head hurts.
If Cerberus has $11 billion, wouldn’t that be enough for them to BUY out GM and have cash left over? I’m just askin’…..
This whole thing makes absolutely NO sense.
Therefore, as mentioned in Edmund’s Auto Observer, it is more than likely the idea of the brainiacs on Wall Street in order to try to save THEIR bacon. Which is another reason for it not to happen (and the very reason that it is likely TO happen).
http://www.autoobserver.com/2008/10/gm-chrysler-deal-to-save-10-billion—from-where.html
So, let’s play devil’s advocate here. What COULD GM do “with” Chrysler? (Or, vice-versa?) First off, consolodate engineering and design for the US in Auburn Hills and close down the GM HQ (which is up for sale anyhow) as redundant.
Well, they could pare down offerings to the various dealers in a manner last seen in the auto industry in the late 1950’s. (Being a Society of Automotive Historians member, I think in terms of the past a lot).
In the 1950’s, you went to a Chevrolet dealer, and they had several “lines” but really only three basic vehicles; the Chevy line, the Corvette and trucks.
So translated to “now” that could be:
Chevrolet Malibu (including dual mode hybrid version)
Chevrolet Corvette
Chevrolet Silverado (don’t forget dual mode hybrid version)
Chevrolet Volt (yeah, right)
Pontiac G6
Pontiac G8
Pontiac Trans Am (no Camaro)
Saturn Viva (badge engineered Aveo)
Saturn Vibe (moved from Pontiac, new grill)
Saturn Cruze (moved from Chevy, new grill)
Saturn Zafira (small minivan – Brazil sourced?)
Buick Opel Astra (sort of honesty in advertising)
Buick Lucerne
GMC Traverse (moved from Chevy, do dual mode too)
GMC Suburban (do a dual mode hybrid version too)
Cadillac – as is
Dodge Neon (ex-Cobalt – new “happy” face/grill)
Dodge Charger II (ex-Aura moved from Saturn – new grill) – hybrid version also
Dodge Caravan
Dodge Challenger (through 2011)
Dodge Ram (through the end of the Nissan supply contract)(add dual mode hybrid)
Chrysler Valiant (rebadged Nissan Altima)(rental fleet special?)
Chrysler 300 (by 2012, based on Caddy/ reskinned/with GM V6 or V8 Hemi+dual mode hybrid)
Chrysler Town & Country (add dual mode hybrid version)
Jeep Wrangler 2 & 4 door
Jeep Patriot *
Jeep Grand Cherokee – add Two Mode hybrid version
See? Every dealer has a “logical line-up” appropriate to their car division’s make-up in the market. No dealer law-suits.
GMC LLC (GM Chrysler) could own GMAC fully, and Cerberus could own maybe 5% of GMC LLC.
* the Compass is more popular with the ladies, the Patriot with men. Ladies will buy a “guy car” but guys don’t buy “ladies cars” – therefore, leave the one which both will buy…
Whatever deal goes down, it seems that GM would have to characterize it as an asset sale or something similar that would allow it to immediately shed many of Chrysler’s liabilities otherwise the deal simply doesnt make sense. Chrysler’s dealership network, most of its product portfolio are worthless to GM.
If it is truly a merger, GM is going to need a boatload of cash to buyout all of Chrysler’s UAW workforce. White collar workers get shit-canned. Then there will be the dealership lawsuits, etc, etc.
Even GM is not stupid enough to take on all those liabilities simply for the prospect of a government bailout…..or are they???
The anti-trust regulators are all on the beach in Bermuda these days and are not going to be the ones to kill any GM-Chrysler deal. JPMorgan – Chase – Merrill Lynch! Wells Fargo-Wachovia! Bank of America-Washington Mutual!
The concentration of power in the banking industry has doubled in the past few weeks.
If there is a deal, I would expect it to somehow be structured as a sale of assets. Cerberus would sell certain assets of Chrysler to GM, or trade them for GMAC shares without actually handing over the corporate shell. GM may want to control the active assets of Chrysler, but the last thing they want is the hangover liabilities for Chrysler’s retirees and job bankees. Look for the Federal Retirement Benefits Guarantee Fund to somehow get stuck with much of that. See Industry, Airline.
Cerberus could figure out a way to leave Daimler owning the corporate shell and thus the nasty liabilities. Remember, Daimler still owns about 20% of Chrysler.
menno: “If Cerberus has $11 billion, wouldn’t that be enough for them to BUY out GM and have cash left over? I’m just askin’…”
Well, yeah, but the downside to doing so is that they would then own GM. Not the best use of $11 billion, if you ask me.
Ricky can pull out all those 29% lapel pins now
Cross-post from RF’s Chrysler Suicide Watch…
Without any hyperbole, this is quite possibly the worst idea in the history of the universe.
Someone over at GMI who seems to have an inside line on the discussions is saying that the ‘rationale’ (I hesitate to imply rationality) is to create a firm that’s Too Big To Fail.
I stand by my assertion.
Ken Elias:
“In the main, they assembled their hoard by not spending any money on capital expenditure, R&D, engineering or other necessary essentials to carry on as a car company—to the point where the product well is dry.”
You have pretty much described Chrylser under Dumbler. Today? Uh no. Unless the Ram, Journey, Challenger, and minivans were made by waving pixie dust in the air. And let’s not talk about LY, Phoenix, DSG (although Cerberus is really acting stupid on that one), or ENVI. Now we may not know the exact amount of money being spent on these projects due to Cerberus being “private”, but it doesn’t take a rocket scientist to figure out that it is a LOT. This kind of information is not hard to come by (you might want to visit Allpar to start with). And hey, do we really know how much GM is spending on product development or anything else for that matter with their accounting shenanigans? Anyone? Bueller?
“Simply put, it’s not politically feasible to provide loan guarantees to a company owned by private equity.”
True, but how would it look to give taxpayer money to a company (Ford) that is controlled by one family?
John Horner:
“Cerberus could figure out a way to leave Daimler owning the corporate shell and thus the nasty liabilities. Remember, Daimler still owns about 20% of Chrysler.”
Well, the problem there is that Cerberus is trying to get the 20% that Dumbler has. Face it, there is no way, short of C11 or C7 that Cerberus or ANY potential suitor is going to shed the liabilities for retirement etc. As weak and irrelevant as the UAW has become, it still has temendous political clout in DC and the feds are not going to look to kindly at all the those pension obligations being dumped at their doorstep because Cerberus didn’t know what it was getting into in aquiring Chrysler.
windswords :
Most the products you mention were already in development when Cerberus took over. The rest of them– ENVI, Project D, EV minivan, etc.– are smoke and mirrors.
They ain’t got game.
Pch101 – GM is too big to fail already, and to that point I agree with you. But GM’s timing for needing a bailout couldn’t be worse given the distractions in Washington DC of saving the banking system today – and that there’s going to be a new Prez and Congress in January. But the General needs the cash now, and isn’t having much luck finding it elsewhere. So it is faced with the choice of a bk filing sooner, or “buying time” by laying its hands on Chrysler’s cash until it can knock on the doors in Congress.
Look, it’s a stupid deal. But cash is king – and GM barely has any pawns right now.
ferrariman355-
I think one GM brand could be sold.
Buick has equity in China.
They should just sell it to them.
Ken, that article makes a scary kind of sense.
And I will throw in again that GM “leadership” really would like (needs?) to be numero uno in el mundo again.
I suspect the resulting corporation would not realize anything like all of the current combined market share. Maybe a total yeild of 25-27% while still losing money on every vehicle.
This would be final desperation.
Just some thoughtS.
Bunter
But the General needs the cash now, and isn’t having much luck finding it elsewhere. So it is faced with the choice of a bk filing sooner, or “buying time” by laying its hands on Chrysler’s cash until it can knock on the doors in Congress.
I see no evidence that a deal to acquire Chrysler would leave much, if any, cash in the deal for GM.
Cerberus will be motivated to prevent further bleeding and to preserve its capital. It’s not simply going to hand over all of its cash to GM.
On the Cerberus side, the deal seems driven by JP Morgan Chase, which is one of its primary lenders. They know that a BK will damage them; the federal government must know this, too.
On the GM side, I would suggest following the money. Figure out who the institutional bond holders are, and that might tell you who is most motivated to do this deal.
http://www.bloomberg.com/apps/news?pid=20601087&sid=akq1xS5z2JnA&refer=home
With all the different rumors going around, I bet Cerberus is actually telling GM “if you don’t do it, we’ll sell/give it to the Chinese / Indians and then you’ll have someone with deep pockets to worry about later, in competition with you.”
In other words, extortion with menaces.
JP Morgan (and Goldman) could not place all of the $10 billion in debt raised for Chrysler. I believe they still hold a chunk of it – maybe as much as $6 billion. The only question is whether their recoveries are better as creditors to Chrysler, or to GM. My belief is that they too subscribe to my theory – that a combination of GM and Chrysler will most certainly get loan guarantees from the government, whereas a stand alone Chrysler might not. At least that buys time for GM to fix itself – and give them a window to sell the rest of the debt they still hold down the road. But GM wouldn’t certainly do a deal to protect JPMorgan or Goldman.
Like Pch101 says, follow the money. And that’s money on the balance sheet of Chrysler today which GM needs now. Acquiring Chrysler will take no money out of the kitty, GM will just continue to operate Chrysler exactly as it’s being run today – for the time being. Later, with government money, GM will close a bunch of plants and buyout the UAW workers. As for Chrysler dealers – well good luck to them, but it’s not inconceivable that they’ll also be bought out later.
contrary to other commenters, i think this scenario is only too plausible. truly a horrific idea that, through the agency of my overstretched tax dollars, i get to “own” such an incompetent company as the general. too bad nobody is seriously considering firing their inept overpaid executives & board of enablers as part of the solution.
And that’s money on the balance sheet of Chrysler today which GM needs now.
I believe that it is extremely presumptuous to assume that most or all of the cash that is currently on Chrysler’s balance sheet is going to stay there if it is sold to GM.
If that was the plan, then there would be little point in selling it. Presumably, Cerberus wants to preserve as much of its original cash as possible, and that obviously won’t happen if they hand all of it to GM.
On the other hand, I completely understand why JPM would be highly motivated to see Cerberus handed off. They need to protect their collateral, and Chrysler as a standalone may not be large enough to be “too big to fail.”
Don’t worry about any cash that Chrysler may have, the three-headed hound of Hades will have looted most of it by the time a deal goes down.
Any speculation that a combined Chrysler/GM will control 30% of the US market is outlandishly optimistic. The 10 billion dollar cost savings quoted in today’s Wall Street Journal that would result from the merger is pure fantasy.
If GM’s Board has any integrity left they’ll nix the proposed merger.
Robert Farago:
“Most the products you mention were already in development when Cerberus took over. The rest of them– ENVI, Project D, EV minivan, etc.– are smoke and mirrors.”
We’ll have to agree to disagree. While many of these projects were in progress at the time of Cerberus’ aquisition of Chrysler if the plan was to save cash and not develop product then they would have shut them down. If that was not the plan and now it is then the stoole pidgeons inside the company (and they are there) would have alerted the blogosphere to the fact that they were shutting them down. It hasn’t happened. You mentioned project D, I forgot about that one, and I believe it was started after Cerberus took over. Not much has been done there but the fact that it was initiated at all tells me that they knew they had a problem with the D segment cars and they were going to do something about it. The only reason that project D seems to be “smoke and mirrors” is that the sales have tanked and the money has dried up. Cerberus figures they can do someone elses platform for cheaper. I think they are wrong but I don’t get to call the shots. I also forgot about the axel plant they built. And the Hemi update. The facts are just not fitting the scenario in my mind.
“Project D”‘s purpose was to determine if a mid-size platform could be developed which would be flexible enough to build any number of different types of vehicles. It was not meant to develop any specific vehicle – the replacements for the current offerings are/were a different project, which certainly could include platform sharing with another manufacturer.
While I haven’t had personal experience with the ENVI vehicles, I don’t see any evidence that they are “smoke and mirrors” either. As such, that is merely opinion.
To say that there is nothing in the pipeline and that development has stopped is clearly incorrect, since dealers have already seen examples of the new LY cars and the new Grand Cherokee (which reportedly will also share platform with at least a Dodge variant). To blatantly state that there is no ongoing development appears disingenuous at best.
Maybe all the commentators have it backwards. Maybe Chrysler will absorb General Motors. Chrysler has cash. GM wants cash. Reverse mergers are reasonably common in the corporate world. The smaller company nominally takes over the larger company; however the shareholders of the bigger company might still end up with control of the smaller company. I believe the Sears/Kmart merger was of this type. If Chrysler truly has 11 billion of available cash (and I really doubt it), Chrysler could easily afford a tender offer for all of GM’s stock, because GM has a market cap of 3 billion, more or less, depending on the day.
A structure could be put together where there is a public float of thousands of shareholders, but Cerberus continues to hold effective control of the company. In one fell swoop, Chrysler buys a hundred billion dollars worth of R&D and a number of newer production facilities, and in the process gets a structure “too big to fail.” Cerberus gets rid of the current GM Board of Bystanders, and in its place allows “Dean Bob” Nardelli and his cost cutting crew run the show.
The problem with this scenario: GM will need a lot more than $11 billion to become healthy again. Where is the new money going to come from? Good question, I don’t have the foggiest idea, unless that Exxon rumor is true.
Of course, GM will need a lot less money if it goes through a cleaning Chapter 11 bankruptcy. GM says it is not planning for a bankruptcy. That doesn’t mean that others aren’t doing contingency planning for a GM bankruptcy. If the majority of what is now General Motors can be picked up in bankruptcy court within a few months for a few billion dollars, I can think of no entity better placed to retain customer good will & confidence than a currently-operating automaker which promises at the outset to take over GM warranty obligations and keep the company operational. And if it proves impractical to keep up GM goodwill, Chrysler can incorporate the best GM models into it existing Chrysler family of brands, and jettison the rest — sort of a reverse version of the assimilation of Chrysler that has been recently discussed.
It would be better if this reverse mortgage were to be within the framework of a “prepackaged” bankruptcy, but a quick post-filing plan might also work. GM files Chapter 11. A plan is immediately filed for Chrysler to take over the operation of GM net of certain dealer commitments, union contracts, and other baggage, but with payment to creditors of several billion dollars by Chryslerberus. Exxon-Mobil and the Federal Government dump $20 billion new money into the combined and debt-clensed GM-Chrysler, and the next thing you know you have a going-concern company that has a broad product line, is properly capitalized, has a realistic cost structure, a broad technological base, a pared down dealer structure (with room for improvement) and has a huge base of stakeholders who will be unwilling to see the company fail.
See, simple.
Maybe Chrysler will absorb General Motors.
Press accounts that have sources close to the merger talks aren’t suggesting this.
It would also be well out of line with Cerberus’ original plan, which was to outsource a lot of the manufacturing, and to focus on marketing and distribution. They never wanted to be a traditional auto company.
GM needs Chrysler’s workers, plants, and powertrains like it needs a hole in the head.
The Jeep brand and the Chrysler minivan designs are worth something and would be greatly improved by GM engines–and transmissions in the case of the minivans.
I am starting to think it is not GM/Chrysler that will get the bailout. In the (limited) articles I have read, Cerberus is trying to aquire the remaining GMAC shares. That is where GM is hemoraging at the moment. If GM didn’t have that debt hanging over its head, had it’s number 2 national rival and a ready stockpile of cash, it might not need bailout. However, if Cerberus was out of the auto business and solely in the financial business…and bailout came (so hard working Americans wouldn’t lose their over financed cars) to write off bad loans (i.e. the current banking situation), it would be free money for Cerberus.
Any takers?