AFSCME 3357-HOF'S BLOG

Chrysler on the Auction Block and Chopping Board
13,000 Layoffs through 2009
Chrysler Division being Prepped for Sale - To General Motors?

As I reported last week, Daimler Chrysler announced plant closings and layoffs. The total number will be 13,000, somewhat more than originally announced, but an overall smaller percentage than in recent restructurings by General Motors and Chrysler.

The over-all tone of the announcement suggests that German management isn't just pruning deadwood, it's prettying up the yard to sell the house. Daimler Chrysler stock has surged in recent months as speculation surrounding a US - Chrysler spinoff has escalated. In today's Wall Street Journal, there is an analysis that argues that the Chrysler division is a net drag on DCX stock such that even if Daimler Chrysler gets nothing in return for getting rid of Chrysler, it's still worth doing.

The Detroit News speculates that a variety of entities would be interested in buying Chrysler. Renault-Nissan is the first one that comes to my mind. Renault is interested in entering the U.S. market, and that company has had long historic ties to Chrysler. To a certain degree, Renault was involved with the design of the first generation Chrysler minivans and the Omni/Horizon subcompacts. (See www.allpar.com for more details.)

A GM - CHRYSLER MERGER

Here's the good part, though. There are rumors of a GM purchase of Chrysler. How could nearly-bankrupt General Motors buy its former-Big-3 rival? Why would General Motors buy Chrysler? Doesn't GM already have too many models and dealers? At first look, the idea seems ridiculous. But, after giving it a little thought, I think you could construct a deal that would be a win-win proposition.

First, you have to figure that GM would not actually pay any cash for Chrysler. The key to making the deal work would be an investment by Daimler into GM in exchange for GM stock. Most likely, the stock would be a new class of convertible-preferred stock, coupled with a debt issue secured by Chrysler assets. Prior to all this happening, Daimler would have to get Chrysler ready for sale, and that's what the announced restructuring is leading to. The plant closings essentially prune high-cost light-truck capacity. General Motors already has plenty of truck models. While some would disagree, the market has determined that GM trucks are better. Chrysler has some stars though. The Jeep product line is profitable and isn't duplicated by any GM division, Hummer notwithstanding. GM would love to have the 300 series rear-wheel-drive models. GM has given up on minivans, and Chrysler still sells a third of a million a year of them. A GM purchase of Chrysler could be structured such that GM and Daimler would end up with a structure like a Japanese Keiretsu.

In a smartly structured deal, Daimler could be positioned to pick up the juicy bits in the case of a General Motors bankruptcy. In fact, selling Chrysler to GM on the eve of a General Motors bankruptcy might allow Daimler to get back key Chrysler assets without being burdened by union contracts and dealer obligations. I thought Carlos Ghosn was positioning Renault/Nissan for a post-bankruptcy GM when a GM deal was being bandied about last year. In response, Rick Wagner & Co. responded with a Pythonesque "I'm not dead yet", and squashed any hope of a deal.

Anyway, if there's a GM-Daimler Chrysler deal involving secured debt and a new stock class issuance, you heard about it here first. I'll take my corporate finance endowed and tenured university chair in red velvet please. You'll know that there's something to this GM talk if the next big announcement from Daimler Chrysler involves a massive reduction in the number of dealers. On the other hand, if Dieter Zetsche really wants to take advantage of a GM bankruptcy, he may not worry about the dealer network at all prior to making a deal. The dealer network becomes GM's problem, a problem easily resolved in bankruptcy.