MERGER: DO, OR DIE?

GM and Chrysler: as one? How could that be? What would it mean?

The initial reports first hit the internet. GM and Chrysler were in exploratory talks. It was down played; explained that companies talk with each other all of the time to explore common goals and interests. But this one has not gone away, and it is actually accelerating.

The automobile sector has always been a cyclical industry. It ebbs and flows with the economic cycles. Manufacturers make billions in the best of times, and save cash to survive the worst of times. This economic barometer has traditionally been read by how many extra shifts are needed to keep up with demand, as opposed to how many auto employees are being laid off.

Domestic auto manufacturers have been hit twice as hard this time around. The inevitable economic downturn came, but they were caught with all of their eggs is one basket. Trucks and large SUVs brought them record profits. Domestics specialized in them. Then, gas prices escalated and they were all caught without a backup plan. Not only were consumers buying fewer vehicles, but they looked to the foreign fuel efficient choices when they bought anything at all.

Daimler was not happy with their purchase of Chrysler and sold the majority of its interest to the investment group, Cerberus, back in early 2007. Perfect timing! Daimler dodged the bullet that has hit all three domestic manufacturers straight in the eye.Ford, GM and Chrysler are all in dire straights. Not only did demand for their product cease, but the credit structure that sustained their livelihood collapsed as well, all part of the housing credit debacle. Now, with survival at stake, all three need money, and they need it now.

Rumors are flying. Ford, on the heels of already selling Aston Martin, Jaguar and Land Rover, is now rumored to be in talks to sell its one third stake of Mazda, either back to Mazda or to a group of Japanese companies. Chrysler’s Jeep brand might be sold to Renault. And now, GM and Chrysler are going to merge? The others make sense, but a GM/Chrysler merger is puzzling. What form would it take? What would it look like? What models would stay, and which would die? Or, would GM just swallow Chrysler and liquidate everything in sight to benefit from its $11.7 billion of cash and sell the remaining hardware?

Many stumbling blocks and questions remain in the way of a GM/Chrysler merger. What role will the unions play in allowing a merger to succeed? Also, Cerberus must buy the remaining 19.9% stake of Chrysler that Daimler still owns, in order to be free to merge. Would the government allow them to merge and own 36% of the US auto market? What would happen to the finance branch, GMAC, a hotly contested issue between GM and Chrysler? Cerberus already owns 50%, GM the other 50%. The investors that are Cerberus wants all of GMAC, and for good reason. When the economy turns around, its massive influence in providing credit is worth millions.

GM now has many interesting choices throughout its product lines (see previous blogs), but within GM, there is already too much redundancy (see my blog, “Power of Twins”). What would be the outcome of diluting the product line further with all of the various Chrysler models? Some would stay, many would not. If the merger became a reality, my crystal ball says: Jeep will remain, GMC will go, Chrysler will become an affordable luxury wing, Dodge will remain with several performance models, Viper will be sold to a customizing manufacturer, Hummer will be bought by an Arab or Russian company, Cadillac will continue to thrive as an icon, Chevrolet and Buick will blend together to become one, eliminating many models. In addition, there will be fewer dealerships, higher prices, many more plant closings, and thousands more jobs lost. GM will again dominate the domestic auto industry, and I will still prefer Ford, or a Japanese brand.


This story seems to change by the hour. Stay tuned to what surely will be a dramatic saga. It is hardly a merger made in heaven, but it appears to be a case of do or die. If the deal does go through, what would the logo look like and how would it fit on the grill of a Solstice?

UPDATE, 11/10/08
The latest rumor is that talks between GM and Cerberus are off, and discussions are proceeding with Hyundai.

UPDATE, 11/11/08
Now GM is out and Cerberus is talking to Hyundai instead. Meanwhile, GM's stock price dropped another 20+%, and a federal bailout is imminent. Stand-by!