US: GM-Chrysler merger brings more problems than solutions - analyst

By just-auto.com editorial team | 14 October 2008

The US market is approaching a turning point, but a possible GM/Chrysler merger creates far more problems than it solves, a US-based analyst said in a research note.

Reports at the weekend indicated that General Motors and Chrysler's private equity parent company Cerberus Capital Management had been discussing the possibility of a merger between two of Detroit's Big Three and have in fact been discussing it for some months now, Global Insight auto analyst Aaron Bragman said.

"The benefits of such a merger are, on the surface, slim for both GM and Chrysler. Both companies have significant and similar problems (too many dealers, damaged brands, falling sales, overcapacity, inability to raise capital) that combining forces will simply not cure," he wrote.

He added that the real winner in any merger between Chrysler and GM would be Cerberus, which has reportedly requested full ownership of GM's part-owned finance arm GMAC - in exchange for Chrysler.

Weekend reports said GM and Cerberus Capital Management had, in fact, been discussing the possibility of a merger of the two struggling automakers for some time, and that the talks had, only recently, been put on hold due to the ongoing financial crisis and the plunge of the global stock markets.

Initial reports said Cerberus was actually the interested party, offering up Chrysler to GM in return for the 49% of GMAC that Cerberus does not already own. Neither GM nor Cerberus had officially commented on the reports, but Chrysler had said it routinely discusses partnerships with other automakers, not specifically naming the possibility of a GM deal, Bragman noted.

"GM originally submitted bids when Chrysler was up for sale by Daimler, but was either outbid or simply not selected by Daimler, with private equity firm Cerberus Capital Management instead winning 81.1% of the automaker. Daimler continues to hold a 19.9% stake in the company, but reports last month that Cerberus had approached Daimler about buying the remaining stake from it now look like they were a prelude to another transaction, a potential sale of Chrysler to another entity (as Global Insight suggested)," Bragman wrote.

He described the news of a potential merger between GM and Chrysler as "an astonishing development, not for the fact that the companies are all considering desperate measures in this current difficult financial and sales environment, but that the benefits to either GM or Chrysler of such a transaction are scant.

"The details of what a combined GM/Chrysler would look like point to a company that would immediately be in an even worse position than either of these companies are alone.

"True, the combined company would have a larger market share than GM does alone, but with sales sinking at Chrysler, even that additional market share would not be terribly large.

"The combined company would have a larger, stronger position in bargaining with the United Auto Workers (UAW) union, but frankly, another round of discussions are already likely to happen between GM and the union as the company continues to struggle with all of its costs.

"No, the negatives far outweigh the positives for any potential merger of GM and Chrysler. Each company has too many dealers in the United States, and has had an extremely difficult fight to reduce the number of retail outlets it has to better match its market share.

"Chrysler has had some success with its Genesis programme, but is likely to have better success once it gets to the point where it begins seriously trimming its product line.

"But as for GM, adding 3,500 Chrysler dealers to its already oversized roster of retail outlets that it is having trouble shrinking is not a good idea."

He added that another of GM's "big issues" is its brand proliferation, typically viewed as several more than it needs given its market share.

"Holding Toyota up as the generally accepted ideal, that company operates globally with a minimum of brands, using the Toyota brand itself to carry the company around the world. GM by contrast has nearly a dozen global brands, many of which in the United States are criticised for having nearly identical overlapping product (the proliferation of Lambda-platform crossover utility vehicles is becoming dangerously close to fitting this description)," Bragman said.

He said Chrysler's three brands are considered by many to be damaged goods, with Chrysler and Dodge no longer commanding the following in the United States that they once did.

"Furthermore, those brands pretty much only operate in the United States; less than 10% of Chrysler's total 2007 sales came from outside North America.

"Only the Jeep brand is really worth anything on a global scale, Chrysler and Dodge are almost entirely North American-centric, and feature product overlap in the same way that much of GM's brands do.

"Having GM add three brands to its already bloated structure would not help the company in any way; swapping Hummer for Jeep or somehow combining the two would likewise really not solve the issue facing those brands—that the market for what they sell has tumbled dramatically."

Bragman summarised Global Insight's view thus: "There is honestly very little of value at Chrysler that would interest GM. There is no proprietary technology that GM would be able to add, no untapped pile of cash that Chrysler is sitting on, no particularly strong platforms or powertrains that could be co-opted for use in GM vehicles.

"Chrysler does have minivans, a product segment that GM abandoned with the current cycle of CUVs, but the company's success in the much more expensive CUVs has made the need for minivans seem small. Product overlap would be rampant—both companies have big, new full-size pick-up trucks, well-developed rear-drive sedan platforms, and GM is actually ahead in terms of engine technology.

"For Chrysler, any discussion of what the company would gain (such access to small cars, better international distribution) has to be tempered with the likelihood that Chrysler would be decimated by cuts and closures from a combination with GM.

"Loss of jobs would be significant, as elimination of duplicate departments, manufacturing facilities, engineering efforts, potentially even whole brands would cost hundreds, if not thousands of jobs.

"Chrysler remains a much better, more attractive target for an international company like Fiat, Renault, or one of the Chinese or Indian automakers, which have no presence in the United States market yet desire to have one."

He said Chrysler has the technology and platforms that could make Tata a global player while its US dealer network would instantly allow it to establish a major presence in the United States.

"But combining with another American automaker simply compounds the struggles each automaker is having into a greater morass," Bragman concluded.

"The only true winner in such a scenario would be Cerberus Capital Management. The company's reported offer was to give Chrysler to GM in exchange for the remaining portion of GMAC that the private equity firm does not already own. The US government has just passed a US$700bn Wall Street bail-out bill designed to buy up bad [secured] mortgages, a bail-out that is very likely to help GMAC considerably. There is even talk about extending that bail-out to cover bad auto loans as well. That one-two punch would go a long way towards restoring the profitability of GMAC, making it an attractive business to have.

"For Cerberus, the opportunity to swap the troublesome auto company business for the about-to-be-healthier paper finance business would definitely make it the winner in this whole discussion."