Big Two in the Making?

General Ford? Chrysler Motors? How about we just merge all three big U.S. automakers into one, call it GMCF and be done with it?

A flurry of news reports this weekend said General Motors Corp. has held talks recently with Chrysler and Ford about a merger, and yet others said Ford is thinking of selling its one-third share of Mazda to shore up its financial position. Given the turmoil in the stock and credit markets these days, there seems to be strong incentives to arrange some kind of corporate marriage or major asset sale -- and almost as many barriers.

Sources at the automakers confirmed on Friday night and Saturday that talks between GM, Chrysler and Ford had occurred, but would not describe them as anything more than preliminary. The talks between Ford and GM, a source said, were not merger-oriented; rather they focused on an alliance or other partnership, and in any event have broken off.

Officially, both Chrysler and General Motors released statements acknowledging efforts to explore new business opportunities, but neither would confirm specific talks of a tie-up with the other.

"We frequently have conversations with other automakers on subjects of mutual interest," said GM spokesman Tony Cervone. "That is not related to this particular rumor, which we are not, as a matter of policy, confirming or denying." The lead spokesperson at Chrysler made a similar statement. "The company is looking at a number of potential global partnerships as it explores growth opportunities around the world," Lori McTavish said. "Beyond those partnerships already announced, however, Chrysler has not formed any new agreements and has no further announcements to make at this time."

One scenario has GM, the largest U.S. automaker, taking control of No. 3 Chrysler, giving the combined entity roughly 35% of the U.S. market while providing possibilities of significant cost savings for the automakers.

Another possibility would have ...

GM trade its 49% stake in GMAC for Chrysler. Chrysler's parent, Cerberus Capital Management, already owns 51% of GMAC, which is GM's lending arm. A source familiar with General Motors downplayed the chances of such a swap, suggesting it would be overly favorable to the private equity firm.  

GM sold the majority stake in the automotive and mortgage lender to a consortium led by Cerberus in late 2006 for $7.9 billion. Cerberus acquired 80.1% of Chrysler from German automaker Daimler in August 2007.

All three U.S. automakers have run into financial difficulties amid the current economic downturn. Rising gas prices and sinking consumer confidence have hurt the entire industry. For GM, Ford and Chrysler, lineups heavy on unpopular trucks and SUVs have pushed down sales even faster than most rivals. Through September, GM's sales are down nearly 18% compared to last year, Ford's are off 17%, and Chrysler's sales have decreased 25%.

Questions about liquidity have plagued GM and Ford since the spring. GM is burning through roughly $1 billion per month, eating heavily into its reserves, which stood at $21 billion at the end of the second quarter; Ford's cash stockpile weighed in at $26 billion at the end of June. 

This week, renewed doubts about sales and cash supplies drove shares of GM down to 58-year lows, reaching as low as $4.76 on Thursday and putting the company's market capitalization under $3 billion, while Ford dropped to $1.99 on Friday, its lowest level since 1982. 

Chrysler executives have repeatedly said the company is meeting the expectations of managers at Cerberus, but have not specified what those are. Over the summer, Chrysler was unable to find sufficient funding for a major credit facility is hoped to renew. That, combined with huge declines in residual values of its vehicles, forced Chrysler to abandon automotive leasing.

Word of conversations between GM and Ford illustrate the pressures all three automakers are facing. With limited access to capital on the open market, terribly weak September sales, and increasingly negative assessments from Wall Street, the Big Three would appear to be considering all options at this point.

Although sources suggest that talks between the two giants stopped short of a merger, a working alliance between the two would be a significant break from nearly a century of rivalry. A potential sale of highly profitable Mazda underscores the seriousness of Ford's cash situation. Earlier this year, Ford sold both Jaguar and Land Rover. It also owns Volvo, but has denied it will sell that unit.

All three companies have taken aggressive steps to cut costs. They have reduced production, laid off tens of thousands of workers, and announced plans to overhaul their lineups to include more smaller, fuel-efficient cars, while producing fewer trucks and SUVs.

In July, GM revealed a plan to raise $15 billion, largely through $10 billion in cost cuts. And additional $5 billion would be raised through secured borrowing and asset sales, including its Hummer brand, which it put on the block. That sale has not gone through, and reports suggest that the nearly frozen capital markets have made such a deal all but impossible at the moment.

Given such challenges, industry experts say a merger would provide ample opportunities for GM and Chrysler to further cut costs. Because both automakers have a large number of similar vehicles in their lineups, combining forces could allowsome vehicles to be taken out of production, with concomitant reductions in acquisition, distribution and marketing expenses. 

That would likely lead to further job losses. This year, the auto industry has laid of 80,000 workers in the U.S., and last year another 70,000 workers were pink-slipped. In September, sales reached 15-year lows, and recent reports indicate that the 2008 total for the U.S. sales could be as low as 13 million units, almost 20% below last year's total.

Most of those cuts have come from the Detroit automakers. On Thursday, Volvo, a unit of Ford, said it would lay off 6,000 workers, triple the number it had announced in June.

Chrysler's previous link-up with another automaker, Daimler, proved an unhappy match. Chrysler was acquired by the German maker of Mercedes-Benz vehicles in 1998 for $37 billion. That mashup proved unworkable in great part because the two carmakers made vastly different kinds of vehicles, and because, ultimately, Chrysler's money-losing ways proved too much of a drag on Daimler's results.

Prior to Chrysler's 2007 sale to Cerberus, GM had considered a purchase of the automaker, which makes Jeep, Dodge and Chrysler vehicles.

More recently, Chrysler was again object of speculation, this time from France, where it was rumored Renault-Nissan was interested in acquiring a stake in the Detroit company, or in forming a joint venture or other partnership. That has not materialized.

Last month, Daimler said it was in talks with Cerberus to sell the remaining 19.9% stake it holds in Chrysler.

GMAC, meanwhile, has had its own problems. Founded by GM to finance sales of its vehicles through dealer showrooms, the lender in the past decade invested heavily in home mortgages through its ResCap, or residential capital, division. While ResCap was among the lender's most profitable areas for a number of years, it has taken heavy losses as the value of its mortgage holdings has plummeted in the subprime lending crisis.

Like other lenders, GMAC has been hampered in its ability to raise capital due to its holdings. However, it has also been impaired, some say, by its close association with GM, which has had its credit rating cut from AAA to B, or junk, status in recent years.

By separating GM and GMAC, one line of thinking goes, the lender could potentially improve its own credit ratings. And GM, by acquiring Chrysler, could have access to the large reserves of cash -- as much as $5 billion -- that the smaller automaker has on hand.

Sources reached on Saturday, however, suggest that GM would not be interested in such a deal, indicating that the trade rumors may have come from Cerberus, which has shown confidence in the lender's operations of late, calling mortgage-backed securities undervalued.

Although the GM and Chrysler talks continue, a source said that they are unlikely to result in any deal for weeks, if not months.

-- Ken Bensinger

Photo of Chrysler Chairman Robert Nardelli, Ford Chief Executive Alan Mulally and GM Chairman Rick Wagoner in January courtesy of General Motors

Comments

[nick]

bad ceo for gm

[Patrick]

Well, most people on the Coasts want to see Detroit fail and Michigan to lose thousands of jobs. Most folks in Cali are cheering Detroit's demise.

[Alessio]

Says you Patrick. What good or motive would people ok the coasts have in our automotive industry dying and fellow citizens losing their livlihood?? If anything, I hope YOU get a bit of bad karma for making such moronic comments.

[Sal B]

>Well, most people on the Coasts want to see Detroit fail and Michigan to lose thousands of jobs. Most folks in Cali are cheering Detroit's demise.<

@Patrick

Who In the Hell are you to pontificate as to what millions of people on the coasts are thinking? I, for one, don't take any satisfaction in seeing what once were incredible engines of industry and for middle-class jobs fail. The problem has been with the cars they made, how they lost their way. They're more to be pitied than condemned.

[Ron]

What we should be doing as a country is finally supporting our own. That doesn't mean buying whatever our industry hands us, but at least looking at these products and encouraging our autoworkers. I'm impressed with some of the most recent products from the Big 3 (Saturn Aura, Ford Fusion, Chevy Malibu, to name a few). If the Chevy Volt is not too pricey, I'd love one as a commuter car. Patrick, you should be ashamed to make such a stupid comment. The Big 3 in Detroit also make large factories all over the country, and Michigan (like California) is one of the countries major R&D centers. The funny thing is that most often the people I hear bashing America's auto industry is little punks who drive Corollas with wings and LED kits. You in that crowd Patrick? Yes, as Sal B says, they deserve our pity, and actually our help and respect. I agree though with the first comments, horrible managers these companies have had for years. Don't blame the workers and designers for that..

[Jeff]

This reminds me of the local Vietnamese or Philippine kids who will brag how Japanese cars are better than Americans. It is like self-hate of the country you live. Well, guess what happens in the long term if the US auto industry dies? The country will become a backwater, and these same kids' children will be working at McDs. Very clever! Wonder why the Japanese and Koreans protect their auto industries like mad? Hmm.. Think those countries are going to let in immigrants from South East asia to work? Hmm.

[Robert NO longer in LA]

Jeff...we BECAME a backwater when we accepted the CRAP from Detroit....sadly, while Toyota MAKES good cars, their dealers SUCK! Got far too HAPPY with the huge run up in sales. Mind you, we have a buffon in the White House that squandered so much National Treasure on his War Folly, to say nothing of Repub RICO...now, the DEMS from NY, MA, CT are encouraging Wall Street to BLACKMAIL us, EXTORTING the 1st INSTALLMENT of $700 BILLION, to make NY, MA and CT WHOLE - all 3 states are FINANCIAL SERVICES DRIVEN...with CT being the favoured HOME to the CEOs. The bailout has lots or RICO ornaments for grotesque PORK (rum?? wood arrows??? etc) and NO fingerprints as to WHO put them there. Where IS Pelosi? Where IS Barney Frank? Where IS Clinton? I am damned curious how this RICO/theft and corruption extends out from the Dems, now that they are feeding at the POWER TROUGH. Aren't YOU, and the rest of the US Citizens, CONCERNED about this????

[Adam Lawrence]

Detroit's completely bereft of new, exciting ideas. Volt? Joke. Electric Wranglers? Joke. Plug-in Escapes? Joke. Merger? Joke. Get with it Wagoner. What America wants and what America needs is real innovation. We are all very impressed with your successes overseas, but how about your base? Time to go, Rick.

[Sean]

This is a good stance and an opportunity for GM to buy Chrysler. I'm a Chrysler fan, a mechanic and I own two of their products. Furthermore, I used to deal with American Motors and they've fizzled. I've noticed of Chrysler's losses such as lack of production of cars and trucks to satisfy the customer needs and new alternative fuel programs. Let alone the Electric car program which I will be dealing with them in the near future. I would like to see another company other than Ford to help run this failing company. I don't think Chrysler learned from what happened to AMC after they purchased them.
If it's true that GM will buy the company I'm part of, I hope they will acquire some of the technologies from the Chrysler's truck line up because not one I've dealt with had major problems. With my concerns with Jeep, I hope GM will not kill the Wrangler, just to let the compact Hummer H4 or whatever it is, survive. Let's hope GM will take this consideration upon making their aims to buy out the company.

[colmotor]

it's a simple equation.

build a better product, people will buy it.

GM and Chrysler. In general it sounds like strapping two drunks together to see if the will walk straight, I think Chrysler seems to get the worst end of the stick... they seem to be the only American company with half an imagination. Then I seriously would not have an American car company to call "my favorite underdog."

[Rick]

@colmotor

Right on. Consolidation of losers just makes a larger group of losers (while some are ushered towards the door via redundancy).

If there is only 1 U.S. car manufacturer, then it'll only take 1 take-over from a foreign company to make zero. Be afraid.

[everett hurst]

I have a 59 chevy truck. It NEVER breaks down. I have a 67 nova that runs and runs. That said I have POURED money into any modern American car. Interiors of american cars have been garbage for decades.
I am surprised anyone has bought these cars. If I do shoddy work I lose my job. If Detroit continues to make garbage then sad to say turn the lights out. And if there is money to be made and a good product another phenix will rise. Companies will come and go. It is a cycle. Saving a company just because it is a US company is bad business. BMW builds here, Mercedes, Toyota. Obviously we can BUILD cars in the US. Our designs just have been bad. Ill buy a foreign cars until the US can build anything worth its weight.

[Jared]

Listen... GM is/has operated on the same archaic system for how many years now? How many MORE millions do they STILL need to realize the business philosophy, "Give people what they want, and you will profit." GM/Chrysler have NOT consistently given people what they want. Give us an inexpensive ($10k NEW), worry free car that is safe, gets 40-60mpg, and reliable. You had how many years to work on this? There is NO REASON we ALL shouldn't be driving 100% electric cars! The sooner they realize this, the better.

[tsm]

Except for the “Patrick” character above, all of us coastal Amerika-haters recognize that the U.S. manufacturers eviscerated their own image with poor quality products, have an insanely high cost structure (including the health and retirement benefits), and now (after years of cross-subsidizing the rest of their respective product lines through SUV/pickup sales) find themselves unable to re-tool for today’s marketplace. And one thing that hasn’t been discussed is the anachronistic “dealer” network and the inability of the U.S. manufacturers to shutter a division or streamline without running afoul with state franchise/dealership laws. (To put this into perspective, it took years and about $2 billion in handouts to local dealers for GM to close down the Oldsmobile division.) A “partnership” between auto-makers won’t relieve all of these burdens. Yet another “restructuring” press release won’t do it. No foreign manufacturer would be willing to take this on. The only meaningful way to “restructure” is through bankruptcy court.