Editorial: General Motors Death Watch 204: GM Will "Absorb" Chrysler

General Motors is on the brink of a financial disaster. It’s managed to keep out of the abyss through asset sales, hocking the company store, and yes, cost cutting. CEO Rick Wagoner’s “plan” might have worked had the economic winds blown more favorably. But they didn’t. The automaker is months away from a liquidity meltdown. Everyone who supplies GM knows it. The rating agencies know it. And yes, Rick Wagoner knows it. GM has to secure new funding or face a bankruptcy judge in Lower Manhattan. So now let’s talk about Chrysler…

Chrysler Motors LLC is owned by private equity fund Cerberus (save a small chunk retained by Daimler). Since purchasing the automaker, Chrysler has amassed an $11b cash trove. In the main, they assembled their hoard by not spending any money on capital expenditure, R&D, engineering or other necessary essentials to carry on as a car company—to the point where the product well is dry.

No surprise there. Cerberus’ real goal in all this: merge GMAC and Chrysler Financial into a global finance company and exit from manufacturing. It believed that Chrysler Motors could survive with rehash of its existing products and as a distributor of other OEMs’ products for a while– until it could find some sucker to buy it.

Like everyone else, Cerberus never expected the meltdown in the auto or credit markets either. So now the Hades Dog is stuck with a manufacturer with no future. And it still has all the liabilities. A Chapter filing would wipe clean Cerberus’ equity investment; maybe five billion dollars gone. So why not follow GM to the federal bailout trough and wait for better days?

Simply put, it’s not politically feasible to provide loan guarantees to a company owned by private equity. First, it would rescue “Wall Street” guys who pay themselves millions of dollars year. Steve Feinberg’s net worth might still be measured in the billions. Second, even if loan guarantees were provided, Chrysler is nothing more than a shell of company anyways. It would be good money after bad.

Meanwhile, GM needs cash STAT. Washington’s printing press already faces a meltdown, as a voters’ bailout fatigue threatens a political backlash. Given the private equity angle, the feds would look to save GM (and Ford) but let Chrysler go.

Only that won’t work either. It’s simply not equitable to have the government make those kind of decisions when voters (e.g. the UAW, suppliers, dealers, etc.) involved with Chrysler are spread across almost all political districts. Imagine the phones ringing in Congressional offices. Washington would be in a bind– save Steve Feinberg and take the wrath of voters everywhere, or let Chrysler go and just save GM and hear about the inequity of the “playing favorites.”

The best case – and this is how it’s playing out – is to let GM “absorb” Chrysler Motors and give Cerberus an equity piece in GM. No doubt, Cerberus will take a writedown, but something is better than nothing. OR – trade Chrysler Motors for the rest of GMAC. Hmmm. Either way, both Cerberus and GM come out ahead. In theory, the new GM controls 30 percent of US auto sales in market share, 50k more workers (soon to be eliminated but we’re not going to tell anyone), additional plants, and 3k more dealers. But most importantly, it has a larger political footprint.

And so GM will acquire Chrysler. A deal that has nothing to do with synergies, cost savings or parts sharing. Nope, it’s all about guaranteeing that Washington saddles-up to the loan giveaway bar for Detroit. Billions and billions of dollars for guarantees or direct loans, all paid for the American taxpayers– who buy more than 50 percent of cars from foreign auto makers. All justified in saving a great American icon of industrial might, a driver of new automotive technology (Volt anyone?) and preserving jobs in the heartland.

But you won’t hear the truth from the auto execs at GM, or analysts or the automotive scribes. Wall Street will celebrate the deal (deal fees in a lackluster M&A market). The automotive media will herald the “bold stroke of genius” and “the next 100 years of GM” or something to that effect, and the auto execs will point to synergies, efficiencies, and other BS.

Everyone else will simply ask WTF? And we just told you the truth: it’s a deal designed to absolutely, positively insure that Washington provides a massive bailout to GM in early 2009. (Ford will follow along on the gravy train too… but that’s another story.)

So there it is – the real reason this deal will go down. Washington will have to rescue GM now, it has no choice. The private equity guys are out of the picture (and off the hook for Chrysler’s liabilities too). The political dilemma solved. Could you script a better scenario?