GM Tries to Sell Investors on Chrysler Merger "Synergy"
C’mon now, don’t laugh. As The Wall Street Journal points out, this GM – Chrysler deal is some serious shit for people who live and work in and around Detroit. “Analysts estimate more than half of Chrysler’s 66,000 employees would lose their jobs in a merger,” the Journal reports. “Thousands more would be affected at GM and at suppliers and service companies that rely on work with Chrysler.” In a related story, helpfully titled “What If the U.S. Auto Makers Don’t Survive?”, the Journal’s Heidi N. Moore asks “How close are we to an ‘ Omega Man‘ scenario? Lache, who expects that in the event of a serious cash crunch ‘sales among the Big Three will decline virtually overnight,’ provides a nice overview of what would happen to the Big Three-dependent businesses: auto-parts suppliers and retailers including American Axle, Autoliv, BorgWarner, Johnson Controls, Lear, Asbury and AutoNation.” I’ll sum-it up for you: nothing good. And in yet another related story ( in fact the one I set out to blog oh so many control Cs ago), we learn how GM’s pitching the Chrysler hookup in this, the worst all possible times to pitch a major merger…
“In recent days GM, its lenders, and Chrysler owner Cerberus Capital Management, have been trying to woo investors with a pitch about the transaction. That pitch touts a combined GM-Chrysler as delivering cost savings of up to $10 billion, an immediate boost in revenue and an increase in cash available to the merged firm… Those cuts could total as much as 40,000 jobs if a deal comes together, said people briefed on the talks.” Yes, the proverbial person “involved in the deal” maintains that “There is simply the savings that comes with both companies not trying anymore to be all things to all people. There are lots of meaningful cost rationalizations.” OK, now you can laugh. But only sardonically.
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The odds of there actually being $11 billion in the bank after GM & Chrysler merge are about 11 billion to one. If Chrysler really had $11 billion in the bank, why would they be negotiating to be acquired by General Motors, a company with a market cap (total market value) of $3 billion. Plus GM is losing at least $1 billion per month? At best, Chrysler's real non-committed cash is in the $3-5 billion range, and the only reason Chrysler has money is that they have cut back on R&D. Chrysler has virtually nothing in the pipeline to replace the models that are already selling 33% less than they did last year. Let's say Chrysler has 3 billion in cash to devote to the deal. For Chrysler to lay off 30,000 redundant employees and give them the typical $100,000 per employee buyout package, it would take $3,000,000,000 in cash.
Conslaw-That's a good point. If Chrysler really has 11 billion in cash just lying around, and they really want to merge with GM, why don't they just buy up all of GM's stock (at a cost of 3 billion)? Then, they could sell the rest of GMAC to Cerberus itself (selling GMAC to itself, in effect, but taking all of GMAC out of GM-Chrysler and into Cerberus's head office), and then Cerberus could spin off the GM-Chrysler combo (such stock would have to be worth at least the 3 billion they paid for GM initially). This would result in exactly the same result as what appears to be proposed. They don't do this because there is no 11 billion.