Federal regulators, dealers and UAW could try to delay or prevent merger of Detroit rivals.
Monday, October 20, 2008
The only scenario seemingly not on the table for Chrysler LLC is the status quo as pressure mounts to decide the fate of Detroit's No. 3 automaker.
The Auburn Hills automaker's owner, Cerberus Capital Management LP, wants to rid itself of Chrysler as soon as possible, and key players at would-be buyer General Motors Corp. are embracing the urgency.
But getting a deal done won't be easy, even if the two automakers agree.
A GM-Chrysler tie-up could face significant regulatory roadblocks, lawsuits, congressional hearings and protests by the United Auto Workers.
It would face a review of up to a year by either the Federal Trade Commission or the Justice Department, said Ted Bolema, a former antitrust attorney with the Justice Department and a Central Michigan University law professor.
"The two companies would control about one-third of the light-vehicle market. That's getting up there in market concentration," he said.
The FTC has reviewed auto mergers in recent decades, including the 1998 purchase of Chrysler Corp. by Daimler-Benz. A GM-Chrysler deal, however, would have more overlap of product lines and dealerships and could take longer to sort out.
The Dodge Ram, along with Chevrolet and GMC full-size trucks, would account for more than half the segment. Chrysler could raise the "failing firm" defense, which says that a merger deemed anti-competitive could still be approved if the struggling business could go out of business otherwise.
Other options remain in play, from the sale of select assets such as the Jeep brand, minivans and full-size pickups, to GM's outright purchase of Chrysler for the purpose of cherry-picking these assets and then eliminating a competitor and some of the industry's profit-sucking overcapacity. Or, a foreign investor could buy the company outright.
But, said Gerald Meyers, former chairman of AMC Motors and a professor at the University of Michigan, "there is no economic justification for the existence of the Chrysler Corp. Whatever Chrysler can do, someone else can do better."
Nor is there a need for duplicate assets, said Van Conway, president of Conway, MacKenzie & Dunleavy, a merger consulting firm.
"You only need one headquarters, one set of designers and engineers."
The premise for proceeding is that a combined company would lose less money than GM and Chrysler would separately, Conway said.
Time, money run short
But the benefits of integration are reaped long-term, while the cash burn and diversion of management time are felt immediately. And the "companies are running out of money now. The question is whether they will be around in a year and a half," he said.
Conway said the new combined automaker would have to be able to increase cash flow by at least 10 percent to be worth the cost and angst. "When you're living on this edge, you've got to be right on.
"Merging a losing company with a losing company can work," Conway said, but it is less likely.
The merger could also face delays if the UAW continues to oppose it or if Congress forces hearings. Northwest Airlines and Delta Air Lines executives have faced repeated hearings on Capitol Hill over their proposed merger since it was announced in April, and the deal still awaits approval from the Justice Department.
A new president could also be aggressive in blocking a tie-up between the companies.
Both presidential candidates have said they want to help the domestic auto industry weather the worst auto market in decades, which is why the sides want to see a deal agreed upon before the Nov. 4 election.
Quick action also might thwart another potential suitor, the Renault-Nissan alliance, which is on the verge of formally deciding if it is still interested in the Auburn Hills automaker.
Statements that Cerberus bought Chrysler for the long haul are falling on deaf ears, especially with the financial tiff that has broken out between GMAC (which is 51 percent owned by Cerberus) and GM, which is now paying dealers an incentive for sales financed outside GMAC.
That is in response to GMAC last week tightening its criteria for consumer automotive financing by requiring credit scores of 700 or more. An industry source called the GMAC move a "squeeze play" designed to force GM into swapping its 49 percent share of GMAC for Chrysler's automotive operations.
Cerberus wants to make credit so tough to obtain through the lending unit that GM will be forced to say, "Oh my God, fine, you want (GMAC), we'll give it to you," the industry source said.
Following AMC's footsteps?
A GM-Chrysler deal would likely mirror that of Chrysler's purchase of AMC in 1987, which spelled the end for Detroit's No. 4 automaker. But the circumstances couldn't be more different.
"This is a real spider web in terms of 'how does this work?' " Joseph Phillippi, principal of AutoTrends Consulting in New Jersey, said of the messy job ahead.
That is in stark contrast with the climate in 1987 when Chrysler took over AMC. "It was simple and easy," Meyers said. Then-Chrysler Chairman Lee Iacocca wanted the Jeep brand only, but AMC-owner Renault wouldn't carve up the company. "There was no haggling," Meyers said. "It was bought lock, stock and barrel."
Chrysler was doing well, and could afford to integrate AMC over a couple of years as it winnowed out excess cost. Jeep was kept intact and grown. Chrysler spent a year ridding itself of Renault, and the rest of AMC was excised over two to three years.
Getting rid of the surplus and individually owned dealers was even more time consuming. "They can't be fired. State laws protect them. They have to quit," Meyers said.
Weeding them out by natural selection was sped up by the lack of product with the death of the Eagle brand, which took 11 years, and there weren't dealer conglomerates such as Group One and Auto Nation to deal with as there are today.
"Now, whoever buys Chrysler is expected to immediately carve costs from the hide of Chrysler," Meyers said.
"It will be an instant bloodbath because both companies are in trouble and can't stand excess costs hanging around for very long."
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