31 October 2008

GM-Chrysler Deal All Done Except Financing

All that stands between the historic merger of General Motors and Chrysler, two of the big three U.S. automakers, is some combination of a loan and/or government aid to finance the deal.

Given the psychological and economic importance of the automobile industry, and the relatively modest value of the companies given their current earnings and market valuations, securing government loans to finance the deal seems likely, and sources of funding have been identified.

A merger would be structured as a GM acquisition of Chrysler, which is currently privately held.

A merger would likely be followed by tens of thousands of white and blue collar layoffs, mostly in Michigan, the discontinuation of competing product lines, a shutdown of many factories, collateral impacts on major suppliers and local governments, and dealership closures nationwide. If this doesn't turn the combined companies, both of which are in financial distress, around, a bankruptcy could follow wiping out shareholders, bondholders and the substantial economic claims of retirees, laid off workers and closed dealers.

The private equity fund which currently owns Chrysler (including its finance company) and 51% of GMAC, would likely acquire all or most of the rest of GMAC, and hold onto Chrysler's finance company, in order to merge the two finance companies. Thus, the GM-Chrysler automobile manufacturer would be stripped of its all of its automobile finance interests.

Earlier this year a Ford-GM merger was considered, but failed.

This is more bad news for Detroit, because it may accelerate the inevitable local economic pain from the decline of the domestic automobile industry.

UPDATE: The Rocky Mountain News editorial board says let them go bankrupt, fearing a long line of industries all awaiting a bailout, and also some of these considerations:

A modest sigh of relief is in order with the announcement Friday that the U.S. Treasury Department will not hand over billions of dollars in federal aid to facilitate a merger between General Motors and Chrysler. . . . a lame-duck Bush administration is not eager to inject billions of taxpayer dollars in a merger that could lead to 40,000 layoffs. That's 40,000 jobs lost even if Uncle Sam pays up and the merger goes through. . . .

GM and Chrysler are indeed in terrible shape. They will hemorrhage money for the foreseeable future and may be terminal cases. (Ford isn't making profits, either, but it may have enough cash on hand to survive.) New car sales are about one-third below 2004 levels, and aren't expected to bounce back any time soon.

Then there are the "legacy" costs: GM and Chrysler face $90 billion in pension and medical expenses for retirees over the next decade. . . .

Bankruptcy may be the only way GM or Chrysler can survive without taxpayer support . . . a bankruptcy court could relieve some retirement costs and let the companies work out new salary and benefit packages that are more in line with the still-generous compensation that foreign-based carmakers offer their U.S. employees.

The court could also examine whether automakers deserve exemption from the state franchise laws giving dealerships what amounts to local monopolies. Would automakers be more likely to flourish if they could emulate Michael Dell, letting consumers custom-order cars directly from the factory and delivering them to their homes?

A recognize the skepticism that a federal bailout will help (I've previously noted that the most sensible thing to do may be to turn the company over to ownership by the retirees to whom those legacy costs are owed), but consolidation might make for a softere blow.

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