Editorial: General Motors Death Watch 205: The World According to TARP
A Chrysler – GM merger is a mind-boggling prospect on many levels. But the over-arching question is simple enough. Why? Why in the world would General Motors want to combine with Chrysler? Given their respective balance sheets and future prospects, the analogies pretty much suggest themselves. My favorite: the Titanic rescuing the Lusitania. But if you want to understand the logic behind this merger deal, such as it is, we’ve got to explore a different metaphor: “changing horses mid-stream.”
First, it’s important to realize who’s holding the reins at Chrysler. While Cerberus Capital is ChryCo’s listed owner, the private equity group used OPM (Other People’s Money) to bankroll their purchase. Reports at the time of sale indicated that Cerberus owner Steven Feinberg used his [then] bulletproof rep to sweet-talk his “partners” into the deal without due diligence. Be that as it may, JP Morgan-Chase are now in the saddle, to the tune of $6b dollars.
Imagine the Chrysler horse trying to cross a river to get to an equine sale on the other side. The rider thought the river was just a trickle. But it turned into a raging torrent, dragging the horse sideways towards a killer waterfall. And there, right next to the Chrysler horse: a steed named GM. Yes, GM’s also being dragged towards the abyss. But GM’s a bigger beast with more friends ready, willing and, uh, ready to attempt a rescue. So the banks decide to switch horses.
OK, enough with the analogies. Let’s talk turkey. I mean, business.
JP Morgan-Chase reckon Chrysler’s going down, taking their six bil with them. So they’d rather have their money in GM, which will, no doubt, receive a federal bailout (the latest rumors have Uncle Sam purchasing an equity stake, I shit you not). For its part, Cerberus [still] has its eyes on GM’s 49 percent share of lender GMAC. Cerberus is also counting on a federal bailout to save that particular piece of bacon, via the Troubled Asset Relief Program (TARP). So the banks get out of Chrysler, Cerberus gets out of Chrysler AND gets GMAC (which it can then, finally, combine with Chrysler Financial).
Fine. So what the Hell does GM want with Chrysler? Cash. As we’ve reported here many times, General Motors is running on fumes. While the aforementioned bailout is a virtual cert, it all takes time. And time equals money. And GM doesn’t have the money to wait until President Obama gets his team together and cuts a deal to save the United Auto Workers American jobs. Their time horizon is the next six months, they’ve sold all their assets and nobody in their right mind will loan GM a plug nickel.
I know it’s a completely counter-intuitive idea: GM getting the cash in needs for its short-term survival by “absorbing” Chrysler. But there it is. Supposedly, Chrysler has amassed a $11b cash hoard, accumulated through the laborious process of not spending it on future products. And then there’s JP Morgan-Chase, who could do what banks do when they have nothing else to do: throw good money after bad. In other words, they’re good for at least a couple more billion.
So GM merges with Chrysler and lives. Of course, the result is The Mother of All Clusterfucks: a gigantic American automaker with 11 weak brands, well over 100 products (many of which overlap), thousands upon thousands of unnecessary dealers, excess workers and plants and facilities, a completely unworkable bureaucratic structure stuffed with managers (who’ve already proven their abject inability to make money building and selling cars) and incompatible software (for all we know).
On the positive side, GM is headed by a man whose only appreciable professional talent is cutting costs and selling things– and God know there would be a lot of THAT to keep him occupied until the cavalry arrives. Obviously enough, the end result would be the same: a large car company that still doesn’t know how to make a profit. Even worse, if the rumors are right, it would be a large car company that doesn’t know how to make a profit partially owned by the U.S. taxpayer.
Many of our Best and Brightest have labeled this deal “America Leyland,” referring to the disaster that was the combination, nationalization and eventual extinction of Britain’s car industry. Spot on. Should this deal down, that’s EXACTLY where this is heading. But it should be remembered that Leyland took more than a decade to take a dirt nap. GM’s management, as always, is thinking about next week. This is, of course, the reason for their demise.
So those of you who said “see you at Death Watch 567” may well be right. While this prediction may now prove to be accurate, I can hardly imagine a worse scenario for American industry, the American auto industry and all the people who depend on it for their livelihoods.
Bytor on Oct 21, 2008"If you shut Chrysler down, you’d have to settle with the pension funds, health care, dealer lawsuits, etc… and that will total a hell of a lot more than 11b." Someone asked why wouldn't Cerberus simply raid the cash and shut down, which prompted the above sensible reply. The same question applies to GM. You don't grab 11B in assets with 30B of liabilities and consider it a good deal. Here the liabilities drastically outweigh the assets. Better to wait for Chryslers collapse and the fire sale to pluck an actual asset. Absorbing Chrysler in hopes of insuring a bigger seat at the government trough just strikes me as outright insanity. GM needs to be thinking focused and lean. Absorbing Chrysler would be a meal that would kill them.
Flarn on Oct 22, 2008
"timothy773 : October 18th, 2008 at 4:14 pm Leyland? In America there was the dizzingly stupid merger of Studebaker and Packard in the mid 50s. Two financially dilapidated companies that made ugly cars merged and went out of business in 10 years. Take a look sometime at the merged companies offering of the 1958 Packard Hawk. A Studebaker Hawk with the ugliest front end in automotive history." Packard was financially sound when it bought Studebaker. It made the mistake of not auditing Studebaker's finances before the merger.
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