AFSCME 3357-HOF'S BLOG

More Detailed Speculation on the GM/Daimler Chrysler Deal

The Financial Times (as reported here in the Detroit News) has speculated that a deal for General Motors to take over Chrysler USA would be fueled by Daimler Chrysler purchasing a 20% equity stake in General Motors. Of course, that's pretty much what I predicted when I posted in connection with the first news story of the GM-Chrysler deal. There's absolutely no possibility that a deal will go through unless it is cash-positive to General Motors, because GM has no cash to invest in the deal. Moreover, GM has to get enough cash to pay for the integration costs and the short-term negative cash flow of the Chrysler division. If dealers need to be bought out, the cash outlay could be huge. Here is a clip from the Detroit News Article

"Since GM is short of cash, an equity deal would make sense if it is interested
in Chrysler, and an equity valuation of Chrysler at, say, 3 billion euros ($3.94
billion), would wind up giving DaimlerChrysler a 20 percent stake in GM," said
Stephen Cheetham, a senior analyst with Sanford C. Bernstein Ltd. said.
"This
kind of deal has some face-saving potential for management, and we believe that
from a shareholder perspective, 20 percent of a combined GM/Chrysler entity is
preferable to owning Chrysler outright," said Cheetham. "However, it does not
give DaimlerChrysler a clean break from equity exposure to the troubled world of
U.S. domestic carmakers, and we would expect the presence of a GM stake to be an
ongoing irritant in (its) relations with investors."
Chrysler earlier this
month announced it lost $1.475 billion in 2006 and said it expects losses to
continue through 2007. Parent DaimlerChrysler, however, earned $4.26 billion in
2006.

Although I haven't seen any articles reporting on this element, don't be surprised if GM doesn't buy the Chrysler Division, but instead, buys the rights and tooling to certain product lines. This would allow Daimler Chrysler to take a huge tax write-off on shutting down its North American operations. It MIGHT trigger an escape clause in dealer contracts. Finally, General Motors (and Daimler Chrysler as GM shareholder) would not be stuck with deadwood. On the other hand, most corporate buyouts are structured as tax-free transactions through the exchange of 80% or more of the stock of one of the entities. Under the asset-sale scenario, I don't know how a tax-efficient result could be reached. Perhaps, if your write down for discontinued assets is high enough, you can afford to report some taxable gain on the minority of assets that are sold.

As I said before, Daimler Chrysler would be unwise to get into a deal that doesn't protect them in the event of a GM bankruptcy. Here's where the investment bankers will really earn their money - in coming up with creative provisions to make sure that happens.

As you are looking at the prospects for a GM/Chrysler deal, keep these factors involved, because they will drive the deal. General Motors has almost no cash, but their stock market price has gone up greatly in the past year, so an equity stake in GM can look like it is worth some real money. Secondly, the stock market has put a null-to-negative value on Daimler Chrysler's North American operations, therefore Chrysler can come out ahead even if it gets no real cash in return for selling Chrysler.