By on October 11, 2008

Last night, the New York Times “broke” the story that General Motors and Chrysler/Cerberus were discussing a merger. The report lacked only one crucial component: facts. As RF reported in his initial blog on the subject, the story unravels by paragraph two. We learn that the entire story is based on “two people close to the process.” While anonymous attribution is common new industry practice, a story without independent corroboration is a nothing more than rumor— especially when it defies common sense. General Motors’ assertion that they routinely talk to other manufacturers about collaborative efforts doesn’t count. But it does reveal the truth of the matter.

In fact, the GM – Chrysler/Cerberus meetings are an open secret. As The General’s spinmeister intimated, GM regularly engages in tech sharing discussions with a wide range of carmakers. Given Chrysler’s yet-to-be-realized tie-up with Nissan, its decision to provide re-badged minivans for VW and ongoing attempts to create a Chinese hook-up, GM is a logical “partner” for Chrysler ongoing campaign to outsource product development. And cut costs.

GM and ChryCo could be discussing rebadged Malibus. Or a Chrysler badged Cobalt. With materials costs soaring, the two ailing American automakers might be examining the possibility of sharing resources. Or looking for economies of scale re: suppliers. And, lest we forget, General Motors owns 49 percent of endangered auto and mortgage lender GMAC; Chrysler’s masters hold the other 51 percent. If GM and Chrysler are NOT talking to each other about GMAC’s future, there’s something seriously wrong (more wrong?) with both companies’ executive management.

It’s no wonder Times scribes Vlasic and Sorkin backpedal on their GM – Chrysler merger story. They tell us that their two sources estimate chances of a merger are “50-50.” There could be “significant roadblocks,” not including the fact that sewing two losing companies together merely makes a bigger losing company. But the real argumentative implosion comes buried in the story: “neither side has yet to dig into each others’ private financial books and records.” How serious can the merger talks be if the lawyers and accountants haven’t even begun diligence? Answer: they can’t.

Clearly, the providers of “all the news that’s fit to print” didn’t give the merger story a fitness test. In fact, this is a classic example of what GM shill Rush Limbaugh calls “drive by media.”

The 24 hour news cycle (of which this writer, typing after midnight, is a member) was quick to pick up the story and discuss all the implications. The CNBC network, “the recognized world leader in business news,” called in the big guns for comment: Ray Wert of Jalopnik. While we understand the mainstream media’s ongoing fascination with the “new hotness” of blogs, Wert screwed the pooch on this one.

Wert claimed that GM and Chrysler “have two different lineups that actually are very complementary.” This is just wrong. GM and Chrysler have nearly identical lineups, with some niche-product distinctions. Recognizing this, Wert contradicted himself in his next comment. “They’re both looking to sell a lot of large trucks and large SUVS, and it makes sense for them to manufacture them on the same platform.”

The CNBC hosts ask Wert about the financial issues in a merger. His vaguely dishes “My assumption is that Cerberus has probably bit off a lot more than they can chew, and with credit kind of crunching in right now it makes a lot of sense for them to try to jettison a company that isn’t providing something that isn’t to their core business plan.” Except that’s not what anyone is talking about. The story from The New York Times: Cerberus would end up with an enormous stake in the hypothetical GM-Chrysler firm.

CNBC concludes by asking Wert about potential issues with a merged GM-Chrysler and organized labor. “I think it’ll be easier for them to get some economies of scale on UAW talks. It’ll be easier to work out one deal as opposed to two deals.” Efficiency in labor talks is a secondary goal (talking for less time, paying fewer labor lawyers). The actual issue is concessions. There is no quantitative academic evidence to suggest that it would be easier for a gargantuan company to negotiate with the UAW and CAW than two very, very large companies. In fact, odds are good the negotiations would be even stiffer.

CNBC failed in its background research. They should have read the editorial Wert published the same day: “GM Will Go Bankrupt: Why That May Actually Be Good For The General.” Considering Wert’s previously held belief that GM would benefit from Chapter 11 filling, why did he suddenly decided that a GM-Chrysler merger be well-advised? Something to do with publicity perhaps?

All of this discussion blatantly ignores the glaring issue: a GM-Chrysler merger would be a disaster. And that’s the truth.

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22 Comments on “Between the Lines: Jalopnik’s Ray Wert on GM – Chrysler Merger...”


  • avatar

    meant to distract from current woes, simply Gorilla Dust…

    H. Ross Perot, Newsweek (12-15-91) “Gorilla dust is his expression for the perennially optimistic statements made by Smith and other company executives. Scooping up some imaginary dirt and tossing it in the air, Perot says, ‘When gorillas fight, they throw dust in the air to distract one another.\'”

    on the other hand, they’d only heen one bankruptcy case, as opposed to two.

  • avatar
    Runfromcheney

    This will only make sense if it is the opposite, and GM merges into Chrysler. GM would be gone, Rick Wagoner would be off to live on a desert island with his $100 million, and Chrysler could gain Cadillac and GM’s better product development resources. Right now, Chrysler’s only issue is uncompetetive products. If they can get two or three really good products on the marketplace, they could easilly come back.

    It would be 1987 all over again, when the resurgent Chrysler bought out AMC. They gained a valuable brand, and lots of resources that would help with product development, as well as some new models to sell. Chrysler could sell Chevrolet, throw Cadillac into their product fold (it would easilly slot above Chrysler, and it would make a much better flagship, anyways).

    On the other hand, if Chrysler merges into GM, then you are right, it would be a flat out disaster. Both companies would go down in NO TIME. But then again, that would allow my claim of Ford being the only one surviving to hold water.

  • avatar
    John Horner

    I have no doubt that serious discussions between GM and Chrysler are going on. The Wall Street Journal has added a little to the story in saying that the transaction being discussed involved swapping the remaining 49% of GMAC to Cerberus in return for Cerberus handing over to GM the 81% of Chrysler it owns.

    As far as the idea of putting Chrysler management in charge of a Chrysler-GM company, I don’t think so. The people who ran Chrysler when it did so well with AMC’s assets are all long gone.

  • avatar

    John Horner has a good point: Cerberus would take over something they understand (finance) and dump the dead weight that has nothing to do with their business model.

    I see no upside for GM, Chrysler’s operations are duplicate and maybe even inferior. Other than free use of the Jeep brand, which is only good for the Wrangler: everything else is overlap.

    But even if they merged, there’s no money to integrate both operations into the RenCen. All the layoffs, broken contracts, lawsuits, etc mean someone’s gotta pony up the money.

  • avatar
    Jonathan I. Locker

    Here is a crazy idea:

    What if both firms already KNOW they are going to file for bankruptcy. If both firms KNOW they are going BK, they also know that the big 3 could easily become the big 2. And they also know that it is likely to be one of them, as Ford is arguably the strongest.

    So they think “Hey, we merge, then we go BK, and then we can take the best parts of BOTH GM and Chrysler, and we will be assured of success.”

    Not saying that this idea would work, but if you are a Big 2.8 executive, and you know BK is coming, you begin to try to save your job (making good cars never having crossed your mind).

    So perhaps the executive floors at these brain trusts think that perhaps a merger then BK might save more of their jobs than solo BK of each firm.

    Yes, this is a crazy thought, but this is also from the same people who thought the Cobalt would compete with the Civic and Corolla.

  • avatar
    yankinwaoz

    Gorilla Dust.. I like it. Thanks.

  • avatar
    Eric_Stepans

    I think these discussions are only tangentially about the business, and are primarily about GM and Cerberus optimizing their shares of government bailouts.

    GMAC has enormous exposure to the subprime mortgage mess. But I suspect Cerberus’ management has many good friends at The Fed/Treasury/etc., and will be able to get some of that $700 billion bailout shoveled their way.

    Conversely, there’s a $25-$50 billion pot of government money for refitting obsolete automotive plants. A bigger GM-ChryCo. means a bigger share of that honey pot.

    From the government handout standpoint, this deal actually makes some sense.

  • avatar
    motownr

    Eric_Stephans:

    The recently-passed TARP clearly provides the Treasury with the right to purchase auto securities & to recapitalize lenders such as GMAC.

    From the standpoint of Cerberus, a ‘clean’ GMAC (and RESCAP) would be a goldmine down the road.

    If Cerberus could also get a tax loss to offset their future gains via a stake in GM which would be written off in Chapter reorganization….even better.

  • avatar
    ihatetrees

    Toyota should go Rockefeller – use 1 quarter’s profit and buy both GM and Chrysler – then shut ’em down. Well, keep Bowling Green working…

    There’s too much capacity in this marketplace…

  • avatar
    bts

    A full on merger between American automakers just doesn’t sit right with me, in fact I think it’s consolidating brands that got them into trouble in the first place. The best way GM, Ford, and Chrysler can help themselves out is by collaborating on part development like transmissions. The new 6 speed auto in many Ford and GM products is a great advantage and I’d love to see a dual clutch transmission. Transmissions work well in this regard because there really is no comparison other than the number of gears. And sharing engines is just too personal. I really doubt sharing engines in the heavy duty pickups would go over too well.

  • avatar

    Toyota should go Rockefeller – use 1 quarter’s profit and buy both GM and Chrysler – then shut ‘em down. Well, keep Bowling Green working…

    And get slapped with an antitrust investigation?

  • avatar
    Geotpf

    ferrarimanf355 :
    October 11th, 2008 at 8:08 pm

    Toyota should go Rockefeller – use 1 quarter’s profit and buy both GM and Chrysler – then shut ‘em down. Well, keep Bowling Green working…

    And get slapped with an antitrust investigation?

    Not to mention Lou Dobbs et al taking a bite out of their leg. Plus, every senator with a GM or Chrysler plant in their state would be wanting their head.

    Besides, it’s actually in Toyota’s best interests to have a (weak) Detroit 3 still out in the marketplace. If any one of the Detroit 3 disappeared, Toyota would not be able to capitalize on it much-the remaining Detroit players, plus people like Hyundai, would be the big winners.

    Toyota’s not going to make a deal like that. If they do buy somebody, it would be the parts of Fuji Heavy (Subaru) or Isuzu that they don’t already own. Toyota has never, ever, ever purchased a non-Japanese automaker, or even a small stake in one (joint ventures and the like excluded). Even Honda has done stuff like this (they owned a chunk of the Rover Group during the 1980’s and 1990’s, which was about as stupid a buy as Toyota buying GM and/or Chrysler).

    Toyota doesn’t want other people’s problems.

  • avatar
    hwyhobo

    Blind leading the blind.

  • avatar
    Dave

    Maybe the plan is that Cerberus dumps the manufacturing company in exchange for the rest of GMAC – but – who gets Cryslers reported $11b? If that goes with the company then you can see the attraction for GM. They get the cash, and Jeep – and prompty cancel all Crysler development and trim production way back to zero. Hey presto – GM pick up $11 b, a great brand and market share of the defunct Crysler. (Can almost see the quote from maximum Bob now, “We can worry about making it work after we’ve moved the money to GMs account”).

    Is it a viable plan? Doubt it, but it’s a plan and going by GMs recent record, it may be the only plan they can come up with. Would Cerberus give $11 bil to get rid of Crysler? Perhaps, if they see an upside to owning 100% of GMAC and factor in the downside of coninued ownership of the noisy end of the business.

    (Wonder how many middle ranking managers in both companies are getting their resume up-to-date right now?).

  • avatar
    zenith

    Just my 2 cents, but…

    The combined company should strip the company’s brands to four “Cs” and one “D”.

    Call all trucks, vans minivans, etc.,
    Dodge.

    Have three brands and one sub-brand of cars: Chevy, Chrysler, Cadillac and Corvette. Have Corvette go to anyone who’ll pay extra for it.

    Thus, we could see full-line dealers; dealers taking on one, two, or three car brands plus Corvette, but no Dodge; Dodge-only; Dodge- Corvette dealerships, etc.

    As for all the orphan brands, make some of your excess dealerships into parts/warranty/ service centers for all those brands.

    There will be dealers who’ll holler about being down-graded to “orphan centers”. Placate them by way of no-interest loans to upgrade service and parts facilities and buy all orphan-brand trades from active-brands dealerships–wholesaling the dogs and giving the orphan centers access to the best stuff (and special-interest stuff such as Solstice/Sky, Viper, Crossfire) as certified-used.

  • avatar
    truthbetold37

    I think…..

    Cerberus controls GMAC.
    GMAC won’t lease or finance GM vehicles.
    GM met with Cerberus to beg them to free up cash and lease or finance GM vehicles.

    GM offered the “Volt” technology in return.

    It wouldn’t make sense to merge the 2 companies. They could share archtectures, but I can’t see a merger.

    In my mind Chrysler has no strengths. Only weaknesses (quality/durability).

  • avatar

    Justin, I’m not always the quickest thinker on the air. Heck, most would also say I’m usually not even the quickest thinker off the air. But I stand by what I said.

    First, the companies do have two different lineups that are very complementary. I should have probably qualified that better on the air by adding “with many vehicles between the two companies that can be cast aside for a better product from the other.”

    Secondly, UAW contracts negotiations for the past three multi-year labor agreements has ONLY been about concessions. What, do you think anyone is seriously negotiating over increases in benefits or jobs? Come on. Also, joint operations would put the company in a position of greater strength in bankruptcy talks — and even avoiding them — especially if any deal requires Cerberus to also pass over some cash in the transaction.

    Third, the NYT article does not say Cerberus would receive an “enormous stake” in the new company. It actually says Cerberus would receive an “unspecified equity stake.” My assumption is they would almost certainly receive a minority stake in the company — mainly because it puts Cerberus in the role of “investor” rather than “owner.” That’s a huge difference when it comes to risk mitigation and GAAP rules as it allows Cerberus to get out of the business of making cars, and get into the less risky business (relatively anyway) of investing in a car company. In the role of an “owner” they could potentially see Cerberus assets at risk if the company goes under. In the role of an “investor,” or even “minority partner,” risk levels are much lower.

    I’d like to tell you more about possible lineups, but you should head over to Jalopnik later this morning if you want to hear the rest of what I have to say. ;-)

  • avatar
    Justin Berkowitz

    Ray, thanks for taking the time to reply. Your comments now, however, are not responsive to the issues I raised in the editorial.

    First, the companies do have two different lineups that are very complementary. I should have probably qualified that better on the air by adding “with many vehicles between the two companies that can be cast aside for a better product from the other.”

    Two problems. The first is that you didn’t qualify it. The second is that this isn’t what complementary means. To say that they have overlapping products, but that some are better than others is not complementary to me. Complementary lineups to me would be GM + Honda. One company builds excellent small cars, a minivan, and no large trucks. The other company makes great large vehicles, pickups, and sports cars. By your definition, GMC and Chevy would be complementary.

    Chrysler and GM both, as you say in the same interview on CNBC, try to make money by building large vehicles. That’s not complementary, that’s redundancy. There are no great small cars between GM and Chrysler. There aren’t even any decent ones, other than the Astra, and that’s not exactly a primetime car. Hummer and Jeep together? The only real area where GM/Chrysler are complementary, to me, is that GM doesn’t have any minivans.

    Secondly, UAW contracts negotiations for the past three multi-year labor agreements has ONLY been about concessions. What, do you think anyone is seriously negotiating over increases in benefits or jobs? Come on.

    That’s what I said in the editorial above: “the actual issue is concessions.” (Paragraph 9, lines 4-5).

    That’s not what you said on air though. You said “I think it’ll be easier for them to get some economies of scale on UAW talks.”

    “Economies of scale” is an economics term. It refers to getting efficiency or cost advantages by doing more of something. For example, “Save the Enzos” T-shirts are cheaper if you print 10,000 of them instead of 100 of them.

    Neither in the interview on CNBC, nor now, do you actually offer any reason why concessions will be easier to get because the “management” side of the negotiation is larger than it used to be. That would be an economy of scale.

    The only economy of scale I can see there is that the negotiations themselves might be cheaper and faster. And as I said in the editorial above, “Efficiency in labor talks is a secondary goal (talking for less time, paying fewer labor lawyers).” And as I said then and you agree in your answer, that’s just not significant.

    Also, joint operations would put the company in a position of greater strength in bankruptcy talks — and even avoiding them — especially if any deal requires Cerberus to also pass over some cash in the transaction.

    I’m not really sure what you mean by this, or if it’s even true. Larger companies have increased debt and contractual obligations, which means they would likely be worse off in pre-C11 negotiations with creditors.

    I can assure you dealing with the bankruptcy process would be much worse if two huge companies just merged.

    It also would likely result in an immediate shareholder derivative lawsuit against the management. I’d explain this in more detail, but it’s more sophisticated than I care to be here.

    Third, the NYT article does not say Cerberus would receive an “enormous stake” in the new company. It actually says Cerberus would receive an “unspecified equity stake.”

    Okay. But Andrew Ross Sorkin, the author of the NY Times piece, corrected you in his very first statement on CNBC right after you spoke, saying:

    “Let me just explain one piece of this Bill, actually. I think there’s no question that Cerberus wants to jettison itself of Chrysler. But under the talks that have been going on, under the terms of the proposal, what would take place is that Chrysler – rather Cerberus – would end up owning a major stake in the combined firms. So fortunately or unfortunately for Cerberus, they would still be on the hook for the fate of both of these companies going forward.” (2:04 of the video)

    With that in mind, let’s turn to the next part of your response:

    My assumption is they would almost certainly receive a minority stake in the company —

    Less than 50%, sure. Enough to drag Cerberus down? See above.

    mainly because it puts Cerberus in the role of “investor” rather than “owner.”

    That’s an arbitrary distinction. See Sorkin’s comment anyway.

    In the role of an “owner” they could potentially see Cerberus assets at risk if the company goes under. In the role of an “investor,” or even “minority partner,” risk levels are much lower.

    All you’re saying here is the smaller your share, the smaller your risk exposure. This is true, but irrelevant. Having 40% of the risk of GM-Chrysler is worse than 80% of the risk of Chrysler.

    Worst of all, none of your comments consider the new financial and legal problems for Cerberus created by the merger. This is before you get into the product and manufacturing problems. Some highlights:

    1. The books for the Chrysler operation would have to remain public as long as the company is publicly listed.

    2. Director and Officer liability to shareholders. Doesn’t exist now because there aren’t shareholders (sure, an investor in Cerberus can sue, but that’s a completely different ballgame). You think the Michael Eisner/Disney derivative shareholder suit was bad? You ain’t seen nothing yet.

    3. Cerberus is used to complete control in decision-making. This would be the worst of both worlds, as they can’t wash their hands of Chrysler but can’t call the shots, either.

    4. Bob Nardelli isn’t going to leave quietly. Just look at what happened when Home Depot tried to cut his salary.

  • avatar
    joeaverage

    Oh great now we can have Chevys, Buicks, Caddys, Chryslers, Pontiacs, Saturns, Dodges, and so on all selling the same dang car with different names… VBG!

    Seriously – can anyone explain why platform sharing is such a big savings?

    Are we saying floors, drivelines, and suspensions together?

    Seems like the interior and bodywork would be a large expense too.

    Does anyone think if in a year that the big three still exist, and if their fortunes improve they will have learned anything from this?

    Will they just pat themselves on the back and go back to business circa 2004?

    Anybody want to guess how much of their problems are self-inflicted (losing marketshare) and how many of their problems are from the financial crisis?

  • avatar
    toxicroach

    I think their problems are entirely self-inflicted, and that the financial crisis is merely exposing the problems.

    They have been pushing the steel as hard as they can for a decade now, constantly offering cheap financing, employee discounts, sales, and handing these vehicles out to nearly anyone with a job. They chose to concentrate on SUVs & trucks while letting their sedans and small vehicles rot on the vine because the profits from the SUVs and trucks masked their weakness, and for the really poor bastards who couldn’t qualify for an SUV even with lax credit standards, well, who else is going to lend them money?

    So they built this defensive position on the basis of cheap gas and easy credit. It didn’t really work THAT well, but it was between that and facing the fact that they needed to file bankruptcy.

    So the gas crisis swooped in and killed their cash cow, which was probably a mortal wound in and of itself. But they had a chance to make it to the mythical year 2010, when all would be right with the world.

    Now this credit crunch is worrying at the foundations of their ability to shovel what cars they have left, since the only way they can move the metal in sufficient quantities now is with cash on the hood or 0% interest, which merely staves off death by cash bleed a while longer while they look for a miracle.

    Sorry to ramble on.

  • avatar
    netrun

    Advantages of tie-up:
    1) Buick, Hummer, Dodge, Chrysler, Saturn, etc get dumped into “new” Chrysler, which then files Ch.7.
    2) GM gets Chrysler’s $11B + double Fed bailout which is close to $15B
    3) Board & mgmt get huge bonuses
    4) What UAW? Current contract burned & buried. Tons saved.

    Disadvantages:
    1) Everyone else is screwed. Dealers, workers, suppliers, etc.
    2) GM fire sale prices + Chrysler quality issues = less market share than they had seperately.

  • avatar
    joeaverage

    So nobody thinks the low gas prices will bring some of the big vehicle consumers back to the dealers soon? Do you think the cheap gas won’t last? Do you think the credit crunch just means that there aren’t enough people who can afford or will afford a new vehicle?

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