GM and Chrysler: Deal or No Deal?

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We just learned that you literally can't order a cup of coffee on Wall Street without hearing talk about a possible combination of General Motors and Chrysler. It's a treacherous block-and-a-half of icy sidewalks (remember, some of us DealBreakers are still on crutches) to the Starbucks on Wall Street, and we passed two different groups of people openly discussing the rumors. And forget about the line inside Starbucks. Was anyone talking about anything else? (The weather doesn't count. But, to be frank, they were also talking about airlines.)
So let's face it. This is all a bit premature. The Germans have just begun considering what they might do with Chrysler. There's no doubt the Daimler-Chrysler merger has not worked out as hoped. And surely Daimler wants to do something big with Chrysler. But it seems very early to speculate on an acquisition by General Motors since Daimler doesn't even seem sure it wants to spin-off Chrysler. It has said it won't rule anything out but right now it's announced plans are an internal restructuring.
Of course, hardly anyone buys that the announced restructuring will go far enough to turn around the troubled Chrysler division. So something bigger must be in the offing, right? But spinning off Chrysler poses more than a couple of problems. First, no-one really knows how to price Chrysler's US business as a stand alone entity. It's got earnings of $61 billion but took a sizeable loss last year. And as hot as the domestic US auto-parts business might be these days—helped out by a declining dollar making US manufacturing relatively cheaper—there really aren't that many people clamoring to get into the business of designing, making and selling cars and trucks. Even Kirk Kerkorian seems to have thrown in the towel.
Let's face it. If you are a private equity shop with a couple of billion in your pocket, do you get into the parts business with multiple customers or do you put all your eggs in one basket and pick up an entire auto-manufacturer? And do you really want to pick-up all those union, health-care and pension legacy costs? When the union strikes, do you want them boycotting the goods of every company in your portfolio?
And this is probably one reason the idea of a combination with General Motors won't go away. Because if Daimler is selling, there probably aren't all that many potential buyers. The New York Times story on a possible joint venture between Chrysler and General Motors involving a big SUV at least tells us that Rick Wagonner is talking to the Germans. (An aside: apparently, US car-makers still spend a lot of their time thinking about those SUVs. Now they just want them all to be hybrids.)
The story is being pushed most heavily by the Detroit auto press and rumor mill, especially Automotive News—folks who actually know a lot about what goes on in Auburn Hills, Flint and all those other Detroit-y places where cars are made. A lot of the speculation to be based on the fact that General Motors replied to questions about the possible merger with a terse "no comment." But this seems to rest in part on a misunderstanding of the disclosure rules governing public comments by publicly held corporations. The board and management of General Motors probably have fiduciary duties to at least consider the possibility of combining with Chrysler—just as they had a duty to consider proposals last year coming from Carlos Ghosn about a three way GM-Nissan-Renault deal. That produced a lot of sound and fury, but signified nothing much. Here GM probably can't say "no way, no how" right off the bat. But they can't say much else either without issuing a press release and filing it with securities regulators.
Would the deal make sense? We're hardly auto-industry experts but we can rattle off some more problems with the deal off the top of our caffeine-and-oxycodone addled brains. Take the potential dealership glut. What are they going to do with all those GM and Chrysler's sales shops? Surely there's way too much geographic overlap. (But then again, how much is this property worth? Maybe there's some hidden real-estate value here.) And when did "bigger and bigger" become the future of US manufacturing? Is that the lesson we think GM learned from watching Chrysler's combination with Daimler-Benz?
Another problem: GM boss Rick Wagoner is a tightwad. Remember the outsized dowry he and the GM board demanded from Ghosn when they considered the combination with Nissan-Renault? How much would GM pay up for Chrysler? When we called one of our banker friends to ask for a valuation on what GM might pay for Chrysler, he joked that GM might ask Daimler to pay them to take it off their hands.
Want to hear something really devious? Here's the most under-handed "explanation" we've heard so far. And remember, this is all blind speculation by people who are prone to paranoid speculation (albeit people who have made a considerable amount of money trading on paranoid speculation). Here goes: the whole SUV joint venture has been a ruse to feel out Daimler's dedication to Chrysler and to fish around for possible plans to sell to a GM rival. GM learned that Daimler was talking to someone—possibly Ghosn—and floated the GM-Chrysler merger rumors through the Detroit press to scare off the rivals. Too scheming? As the saying goes, we report (the unsubstantiated, irresponsible speculation), you decide (based on your own prejudices and gut-feelings).
But all this leaves us with a couple of questions: anyone know what Ghosn's been up to lately? Where's he been having meetings?

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