AFSCME 3357-HOF'S BLOG

From "The worst they can say is no" file:
News reports of Secret Merger talks, GM/Ford and GM/Chrysler


For my fellow 3357 members heading to Cleveland next week, there certainly has been enough automotive industry news to give us something to talk about.

It seems weird that about the same time GM's stock dropped to within a hair's breadth of worthless that news reports come floating in that GM and Chrysler have had and may still be having merger talks. The kicker is that before the talks with Chrysler, GM also asked Ford to hook up. Apparently Ford only liked GM as a friend.

Thursday rumors started about GM/Chrysler talks. Friday the story was confirmed. Allegedly the talks have been cooled by last week's stock plunge, but the possibility hasn't been ruled out. I struggle to come up with any good reason for GM to acquire Chrysler. GM already has too many brands to service with its current product portfolio, and many of the Chrysler vehicles duplicate what GM already has. (Pickups, SUVs . . .) One possibility is that Chrysler is not quite as bad off cash-wise as GM. If you believe Cerberus, and I don't, Chrysler has lost (on a cash basis) only about $400,000,000 in the past year; about a third of the cash GM has been burning through each month as of late. If true, Chrysler would be sitting on a cash horde of a few, let's say four, billion dollars. Also, if you believe the news reports Cerberus doesn't want cash for Chrysler, just GM's 49% of GMAC. Let's face it, GMAC isn't going to make any money any time soon. GM couldn't be proposing a merger with moribund Chrysler just to get its hands on a paltry 4 billion dollars, could it?

Here's where my personal experience kicks in. Once upon a time, I was hired by a company, but I couldn't start work until it completed its merger with another company. I finally started work, and I was immediately laid off. Apparently each company was looking to the other for much needed cash. Both companies were defunct within 3 months.

If GM does acquire Chrysler, GM will have to, in short order, cancel several vehicle lines, shut down several redundant plants, probably kill at least one line of vehicles (and deal with dealer terminations agreements), renegotiate with the UAW and perhaps more unions, and figure out how to change the acquisition from cash negative to cash positive before GM's cash runs out sometime in 2009.

I can think of only one scenario where acquiring Chrysler makes sense, and that is if GM has a secret deal with Exxon-Mobile or another sugar daddy acquiring company, and if that sugar daddy wants GM to have more market share (and/or more political weight) than GM already has. A company like ExxonMobil can afford not just to buy GM and Chrysler but also to roll-up Delphi and start a new financing subsidiary for good measure. Under ordinary conditions, a company like General Motors would be ripe for the pickings. GM still posts annual revenue of about $160 billion, so its current market cap of $2.77 billion is really chicken feed compared to theoretical future profits. To get to those profits, though, a company buying GM would have to plan to put a few tens of billions to cover short term losses and additional restructuring expenses. Still, GM has made progress on its turn around, it's just running out of money and time. With the worst stock market week in history this week, these aren't normal times.

If there's no sugar daddy in the picture, then the news of the merger talks plus the news of other desperate cash raising measures, such as trying to sell its headquarters by begging, putting its suppliers on 60 day payments and mysterious withholdings from employees' pay may signal that the current credit crunch is squeezing the last lifeblood out of an American institution.

One marginally relevant video coming up.