3:35 p.m. EDT Oct. 29, 2008
Skeptics be damned. It looks more and more likely that General Motors Corp. and Chrysler LLC are veering toward an historic merger -- seen by many as a desperate and ill-advised attempt at survival for the two automakers.
In fact, the major issues between the two sides have reportedly been resolved, and if the federal government lends a hand, a deal could be announced as early as this week, much to the chagrin to those on Wall Street failing to see the benefits.
Of course, the negatives have echoed through Detroit for months, if not years. Both GM and Chrysler have too much production capacity; despite cutting thousands of jobs, payrolls are still way too big; GM should be shedding brands, not buying more; domestic cars don't stack up to the Japanese. And so on.
"Globally, there's enough good stuff between the two for a very, very viable automaker for the long term."
To many, a marriage of the two ailing manufacturers would seemingly accomplish little in easing those concerns. Even more capacity. More brands. More dealers. And the same old cars gathering dust in lots across the country. So why do it all?
The most obvious reason: Cash. GM needs some to keep its assembly lines rolling through this downturn and Chrysler, with its deep-pocketed Cerberus owner, apparently has some.
GM is burning through about $1 billion in cash a month and most analysts figure the company can continue at this rate for only another year before something has to give.
And the burn is only getting worse as car sales keep plunging. Industry analysts predict GM's October auto sales, due out Nov. 3, are likely to show a 50% drop from a year ago, perhaps the steepest year-over-year decline in the automaker's history. Clearly, there has to be more to this deal than the short-term fix a cash infusion would provide.
Lincoln Merrihew, an industry analyst with TNS Automotive, said now is the time for the Big Three to become the Big Two in order to ensure the survival of the domestic industry.
"Ultimately, the deal will create a much larger company with fewer brands and more economies of scale," he said. "Globally, there's enough good stuff between the two for a very, very viable automaker for the long term."
He cautioned that it'll be a long, painful and expensive process but one that represents the best chance at a revival for the downtrodden Detroit car industry.
"This is the hardest recession we've had to endure in a long, long time, and my biggest fear is that, barring a deal, we could see one of these companies disappear completely," he said.
David Silver, an analyst at Wall Street Strategies and a vocal critic of the deal, conceded that a merger could actually make sense if the auto market were to improve.
"GM would be able to stop producing minivans as Chrysler already has a large part of that niche market, while Pontiac could be absorbed into the Chrysler name with the likes of the Charger," he said. "If light truck sales ever pick up again, it could be a nasty one-two punch of the Silverado and Dodge Ram leading the way."
The two pickup brands have been battling the Ford (FFord Motor Company
F) F-Series for years as the nation's best-selling truck and should be in line for a much-need bounce when housing rebounds and as gas prices come down.
Still, "partial benefits aside," Silver stood by his gloomy assessment of the industry's future and Chrysler's role in it.
"Whether Chrysler is sold or is forced to liquidate or is forced into a shotgun marriage with either GM or Nissan , it will not end well for third leg of Detroit's Big Three," he said. "Chrysler is bleeding cash almost as quickly as GM and any synergies are still a few quarters away."
LINK:Like it or not, a GM-Chrysler deal looks likely - MarketWatch