AFSCME 3357-HOF'S BLOG

Bush Administration says No $ for Chrysler/GM Merger

Yesterday, the big news was that GM and Chrysler had the merger terms all wrapped up except for the money. A $10 billion triviality. Today, the Treasury Department said no funding will be available for the merger, and the prospects for merger now seem to be all but dead.

What happened to the merger? I'm guessing what happened to the merger is that in their mad panic, the GM/Chrysler crew put together a deal filled with holes, then mis-sold it to the Treasury Department. It looked like Cerberus was trying to dump its crap on the US government and walk away clean. To get a deal done, they probably would have had to put something together where one of the two companies, probably GM was sent through a prepackaged Chapter 11 and immediately rescued by the other company with government help. To sell the deal, Cerberus would have to bring some new money to the table, and Cerberus's bankers would have had to be in for some new money as well. Oh yes, they would have had to give "Hey Rick" Wagoner the boot as well. Since they couldn't/wouldn't do any of those things, the merger was destined to go nowhere.

Apparently somebody in the government got wise to the catch 22 about the GM/Chrysler merger. To be popular, the merger would have to save jobs. To work, a lot of jobs, maybe 40,000 or 2/3 of Chrysler's workforce, would have to be cut. Using government money to pay people $100,000-140,000 each to leave their jobs doesn't sit well with Joe Six-pack (or Joanna Lawyer) who can expect to receive a big fat nothing sandwich when he or she gets laid off due to the bad economy.

Although both Obama and McCain have pledged support to the domestic auto industry. It remains to be seen whether Chrysler or GM can hold out until February. GM in particular has shown signs of being in a severe cash crunch. The General has recently announced cash saving measures from the mundane, shutting down escalators and http://www.thetruthaboutcars.com/gm-voicemail-cuts-explained/, to the drastic, suspending most product development including must-have models such as the compact Chevrolet Cruze.

The importance of the product development delays can't be overemphasized. The Cruze is the replacement for the Chevrolet Cobalt, one of General Motors' best selling cars, but the Cobalt is destined to suffer as newer competitors come out. The Cruze is already in production in Korea as the Daewoo Lancetti, and GM either was set to receive, or has already received, millions of dollars in incentives from state and local governments to tool up the Lordstown, Ohio facility to build it. In other words, this isn't a low-volume, fringe product that needs billions of dollars in R&D to turn into a product, this is a current product set for production in a current factory where there are already incentives in place to start production, and it's a product that could perhaps outsell every other model in the Chevrolet line-up. Still, General Motors can't come up with the cash to get this thing into production by 2010.

If General Motors is already in such a cash crunch that it can't fund essential projects like the Cruze, one wonders whether it's even too late for a Chapter 11 bankruptcy. As we have seen with Delphi, getting sufficient debtor-in-possession financing to continue business is not easy in this climate. Robert Farago postulates that Chrysler is headed for an imminent Chapter 7 liquidation. Ironically, if it doesn't kill the supplier network, the liquidtion of Chrysler might be GM's last best hope, because it might cement the political will to keep GM alive. (Can you say "Lehman Brothers"?) Without government funding, General Motors' chances of survival look bloody awful. With government funding, GM actually looks to have some pretty good long term potential. GM has supported a $30 billion market cap in the past, if the government put $30 billion into the company, assuming the development delay doesn't slow the new model pipeline unduly, the company could easily be worth that much again. GM has some good models and some world class technology. It just needs to pare down deadweight brands and trim dealers. It's going to take $30 billion though, $10 billion will just delay failure.