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October 11, 2008
G.M. and Chrysler Explore Merger

DETROIT — General Motors is in preliminary talks about a possible merger with Chrysler, a deal that could drastically remake the landscape of the auto industry by reducing the Big Three of Detroit automakers to the Big Two.

The talks between G.M. and Cerberus Capital Management, the private equity firm that owns Chrysler, began more than a month ago, and the negotiations are not certain to produce a deal. Two people close to the process said the chances of a merger were “50-50” as of Friday and would most likely still take weeks to work out.

A merger would be a historic event, with two of the most iconic names in American industry coming together to survive in an increasingly difficult environment. Both have roots dating back decades in Detroit and, with Ford, long dominated the auto industry — until Japanese and other foreign car makers began making inroads into the American market.

The auto industry is being pummeled from all sides — by high gas prices that have soured consumers on profitable S.U.V.’s, by a softening economy that has scared shoppers away from showrooms, and by tight credit that is making it difficult for willing buyers to obtain loans. Both G.M. and Chrysler have been struggling with product lineups that are out of sync with consumer demand for smaller, more fuel-efficient cars.

General Motors’ stock has fallen from more than $43 a share last year to less than $5, and it is burning through its cash hoard at a rapid rate. Chrysler, as a private company, no longer needs to report its finances.

The meetings between General Motors and Cerberus began more than a month ago, said people familiar with the discussions, and the companies have held several talks involving their most senior executives. Given that both G.M. and Chrysler are struggling, the two sides may determine a merger may not be in their best interests.

The exploratory talks have included debates over various calculations of the savings that would result from a merger, these people said, but neither side has yet to dig into each others’ private financial books and records.

At the same time, Cerberus is continuing to hold talks with other automakers including Nissan and Renault, said people familiar with the discussions. It is unclear at what stage those discussions have reached.

Speculation about a possible bankruptcy filing by G.M. has mounted in recent weeks because of the automaker’s dwindling cash reserves. The automaker had $21 billion in cash on hand at the end of the second quarter, but it was burning through more than $1 billion a month.

The credit rating firm Standard & Poor’s put G.M. on negative credit watch on Thursday.

But G.M. has said it is confident that it can increase its liquidity, and emphasized in a statement released Thursday that it was not considering a bankruptcy filing.

G.M. once commanded about 50 percent of the American vehicle market, but its share so far this year has fallen to 22 percent, according to the research firm Autodata. Chrysler had a market share of about 15 percent before its acquisition in 1998 by Daimler, but its share this year has dwindled to 11 percent.

How government and labor might react to a potential merger of G.M. and Chrysler is unclear. Antitrust questions could be raised, but political issues could be overshadowed by the precarious financial prospects of both automakers.

If G.M., the nation’s largest automaker, combined operations with Chrysler, the smallest of Detroit’s Big Three, they would create an auto giant that would surpass Japan’s Toyota Motor Company, which recently has been battling G.M. for bragging rights as the world’s largest automaker.

A G.M. spokesman declined to comment on any specific talks with Chrysler. “Without referencing this specific rumor, as we’ve often said G.M. officials routinely discuss issues of mutual interest with other automakers,” said the spokesman, Tony Cervone.

There was no immediate comment from Cerberus.

People briefed on the deal said the talks started as an exploration of possible joint venture opportunities between G.M. and Chrysler.

Cerberus acquired an 80.1 percent stake in Chrysler in August 2007 for $7.4 billion from the German automaker Daimler AG.

Under the terms of the deal being discussed, Cerberus would end up owning an unspecified equity stake in G.M.-Chrysler, people briefed on the talks said.

The ramifications of the merger would be enormous in the global auto industry. G.M. and Chrysler together would control more than 35 percent of the United States vehicle market, and be by far the dominant producer of pickup trucks, sport utility vehicles and minivans.

It would also marry such iconic American brands as G.M.’s Chevrolet and Cadillac with Chrysler’s Jeep and Dodge divisions.

However, the potential merger carries enormous risks. Both G.M. and Chrysler are struggling mightily in what is the worst market for vehicle sales in the United States in 15 years.

People close to the discussions said that if the prospective deal did not happen, Cerberus would probably look to Nissan and Renault.

But the marriage of G.M. and Chrysler has far more potential than hitching Chrysler to a foreign automaker. While G.M. and Chrysler may be hamstrung by labor contracts from cutting jobs, the two companies could combine dealers, product lines and advanced vehicle technology.


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GM would need cash to acquire Chrysler

Analysts: GM would need cash to acquire Chrysler

October 11, 2008

DETROIT (AP) — For General Motors Corp. to acquire Chrysler LLC and all of its warts, GM would have to get desperately needed cash. Lots of it, according to industry analysts.With both automakers struggling to survive amid slumping sales, a slowing global economy and an unprecedented credit crunch, it's unclear whether Chrysler's majority owner, Cerberus Capital Management LP, would be willing to pay up, or whether the federal government might even get involved to save one or both struggling automakers.

"There's got to be more in it for GM than just Chrysler," said Erich Merkle, an auto industry analyst with Crowe Horwath LLP, an accounting and consulting firm. "If you put two auto companies together, both that are losing money, both that are losing market share, you've just got an auto company that's losing market share faster and losing more money."

GM and Cerberus, which owns 80.1 percent of Chrysler, have held preliminary talks about an acquisition or other combination of the two automakers, according to a person familiar with the discussions who did not want to be identified because the talks have not been made public.

A tie-up between the automotive giants would be historic for the industry and solidify GM's position as the global sales leader, which it has been in danger of losing to Toyota Motor Corp. GM and Toyota finished 2007 essentially even in vehicles sold worldwide.

GM and Chrysler already have a joint venture with BMW AG making a hybrid gas-electric powertrain. While melding the companies could save money by combining management, engineering, manufacturing and administrative staffs, analysts say consolidation would bring more costs, and the rewards probably wouldn't come for several years.

That might be too late for both automakers.

Auburn Hills-based Chrysler, a privately held company, doesn't have to open its books, but it lost at least $510 million in the first quarter and $1.6 billion last year. Its sales are down 25 percent so far this year, the worst drop of any major automaker.

Detroit-based GM is burning up more than $1 billion in cash per month, with several analysts predicting it will reach its minimum operating cash level of $14 billion sometime next year. Sales are down 18 percent, and the company has lost $57.5 billion in the past 18 months, largely because of tax accounting changes.

All of this comes as U.S. sales have slowed to their lowest point in 15 years, making bankruptcy possible for all of the cash-strapped Detroit Three if things don't turn around soon enough.

Not exactly the prime scenario for a GM-Chrysler combination, said analyst Kevin Tynan of New York-based Argus Research Corp.

"Even though you're getting the rationalization of folding the two businesses together, it doesn't make sense at this time," he said. "There's got to be some sort of outside motivation for them to do that sort of deal, especially in this market."

That outside motive, analysts speculated, could be the federal government, which would inherit massive pension liabilities if either company went under.

In exchange for taking on Chrysler, analysts envisioned that GM could be given access to low-rate emergency borrowing from the Federal Reserve's discount window, used in normal times by banks.

GM, though, said it is not going to the Fed at present.

"We're not actively pursuing anything at this time," said Greg Martin, GM's Washington spokesman.

The Wall Street Journal reported late Friday that Cerberus might trade Chrysler for GM's 49 percent stake in GMAC Financial Services. Cerberus bought 51 percent of GM's former financial arm for $14 billion in 2006, but since then GMAC has suffered because of bad mortgage loans.

GMAC could look good to Cerberus now, Merkle said, because its insurance and auto businesses are profitable, and the federal government may take on its bad mortgages through the $700 billion financial bailout plan approved earlier this month.

If a merger were to go through, GM could move quickly to cut costs and save billions, said Van Conway, a mergers and acquisitions expert and partner with Birmingham, Mich.-based Conway & MacKenzie. The company would have to calculate whether it has enough cash to stay alive and fund the deal, he said.

If the numbers work, a lean, merged automaker would be in a strong position to make money once the U.S. market recovers and people start buying vehicles again, Conway said.

"You want to be the last man standing here because the car market is going to come back," he said.

Tynan estimated GM could save more than $5 billion a year by running the two companies as one, but said it could take years to realize the savings.

"Over the short term there's very little in the way of consolidation that could occur," said Michael Robinet, vice president of global forecast services for CSM Worldwide, an auto industry consulting company based in Northville, Mich.

Renault and Nissan are still completing their consolidation, even though the companies joined in 1999, he said.

A combined GM-Chrysler would have too much factory capacity, too many brands and too many dealers, the analysts said.

"Adding three more brands (Chrysler, Dodge and Jeep) to their mix and another company that's very heavy in the area of truck production and sales, I don't know how that can be a good thing," Merkle said.

Neither GM nor Chrysler would confirm that they've talked, but each said discussions between automakers are routine. There also were reports Saturday that Chrysler was in talks with Nissan-Renault, and The New York Times reported that GM had approached Ford Motor Co. about a merger earlier in the year, but Ford wanted to stay independent.

Merger talk among the Detroit Three is not new. GM talked with DaimlerChrysler AG in 2007 about acquiring Chrysler before Cerberus bought its stake in a $7.4 billion deal. The talks fell through when GM decided it should concentrate on cost savings and efficiencies by globalizing its own operations.

Cerberus and Daimler confirmed last month that they are in talks for the private equity firm to acquire Daimler's remaining 19.9 percent Chrysler stake.

The Journal said the talks between GM and Chrysler are on hold for now due to recent turmoil in the financial markets.

The auto industry has been hit hard in recent weeks by the effects of the credit crisis, prompting GM and Ford to issue statements Friday to dispel the notion that they might be headed for bankruptcy.

GM and Ford shares were battered with the rest of the stock market this week, falling to lows not seen in decades. GM shares lost about half of their already-depressed value during the week, closing at $4.89 on Friday. Ford shares fell similarly, ending the week at $1.99.

LINK:The Associated Press: Analysts: GM would need cash to acquire Chrysler

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FACTBOX: Key facts about General Motors and Chrysler

Oct 13, 2008

General Motors Corp and Chrysler LLC have been in preliminary talks about a merger, according to a source briefed on the matter.

A merger would unite GM, the No. 1 U.S.-based automaker, with No. 3 Chrysler, both struggling amid a 15-year low in U.S. auto industry sales and market share losses that have left them with far too much production capacity in North America.

A combination of GM, whose stock fell to a nearly 60-year low of $4 last week, and Chrysler -- now about 80 percent-owned by private equity firm Cerberus Capital Management -- would create a company with too many factories, dealers, vehicle models and very similar product lines, according to analysts.

As a result, such a merger would lead to massive job losses, plant closings and elimination of brands and vehicle lines, analysts said.

GM and Chrysler both have extensive pickup truck and SUV lineups in North America and are in the midst of multiyear restructuring, which includes cost cuts and asset sales to raise cash.

Following are some key facts about GM and Chrysler.

General Motors

* Headquarters: Detroit

* Financials: GM has posted losses of $18.7 billion through the first half of 2008 and announced plans to increase liquidity by $15 billion through 2009 with $10 billion of cost cuts and $5 billion of asset sales and borrowing. GM ended the second quarter with $21 billion of cash and $5 billion of undrawn credit.

* Employees: About 266,000 worldwide at the end of 2007, including 139,000 in North America.

* Facilities: Over 160 worldwide.

* Brands: Chevrolet, Pontiac, Saturn, Buick, Cadillac, Hummer, Saab, GMC, GM Daewoo, Holden, Opel, Vauxhall and Wuling.

* 2008 sales: U.S. sales were down 17.6 percent through September. Through June, global sales were down 2.9 percent at 4.54 million vehicles. GM updates global sales figures later in October.

* Key products and U.S. sales through the end of September

- Chevy Cobalt compact car: 162,462 units, up 6.3 percent

- Chevy Malibu mid-size car: 140,555 units, up 37 percent

- Chevy Silverado pickup: 370,502 units, down 22.5 percent

- Chevy TrailBlazer SUV: 65,281 units, down 36.9 percent

- The GMC Envoy SUV: 20,977 units, down 44.1 percent

- The SAAB 9-7X SUV: 2,834 units, down 29.8 percent

Chrysler LLC

* Headquarters: Auburn Hills, Michigan

* Structure: Run by private equity group Cerberus Capital Management, which acquired an 80.1 percent stake in the company in August 2007 from Daimler AG. The German automaker still owns 19.9 percent of Chrysler.

* Financials: Chrysler earned $1.1 billion before interest, taxes, depreciation and amortization through the first half of the year and had $11.7 billion in cash at the end of June. As a private entity, Chrysler is not required to disclose detailed financial information.

* Employees: 66,409 as of June 2008.

* Plants: 14 assembly plants, 10 powertrain plants, four stamping operations and five manufacturing affiliations outside North America.

* Brands: Chrysler, Jeep and Dodge.

* 2008 Sales YTD: 2008 U.S. sales down 25 percent at 1.18 million vehicles; Worldwide sales in 2007 were 2.7 million.

* International sales: Relies on North America for more than 90 percent of its new vehicle sales.

* Key products and U.S. sales through the end of September

- Dodge Caliber small car: 74,069 units, down 8 percent

- Dodge Avenger mid-size car: 53,828 units, down 9 percent

- Dodge Ram pickup truck: 196,048 units, down 29 percent

- Jeep Grand Cherokee SUV: 57,333 units, down 39 percent

- Jeep Liberty SUV: 54,293 units, down 21 percent

- Dodge Nitro SUV: 30,071 units, down 46 percent

LINK:FACTBOX: Key facts about General Motors and Chrysler | Deals | Reuters

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GM Vs. Chrysler: Product Lineup Fantasy Draft

Tue Oct 14 2008

Though the possibility of a GM-Chrysler Merger remains but a 50/50 chance, the non-denial denials have sent our heads spinning. Are conversations actually taking place? Of that we're certain. Will it actually happen? Hard to say. Will it magically save both companies? Even harder to say. What we do know is a combined company would have a lot of products to draw from across various segments, and their lineups are actually, with the right cuts and decisions, more complementary than you would think. We've taken a look at what choices a merged company should make to build their ultimate lineup should the two automakers industrially copulate, recognizing the production realities, brand equity, dealer concerns and other factors that would go into such a decision.

See Fantasy Line-up w/ pictures here:

GM Vs. Chrysler: Product Lineup Fantasy Draft

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GM Deal To Takeover Chrysler Makes Progress

October 16, 2008

GM Deal To Takeover Chrysler Makes Progress, Creating Opportunity For Disaster

The merger talks between GM (GM) and Chrysler appear to be heating up. GM would like to have an agreement in hand by the end of this month.Putting the two companies together would be a disaster.

The UAW would almost certainly fight the deal to the death to save jobs. This could mean a protracted strike would could cut production for months. It would not be unlike what Boeing's (BA) machinists are doing to that company, effectively shutting it down.

Both Chrysler and GM have already cut staff to the bone. There may be some more people who could go in finance, administration, and product development. That represents a modest savings given the risk of integrating all of the operations and production facilities of the two companies. The severance costs could also be remarkably high.

LINK:24/7 Wall St.: GM (GM) Deal To Takeover Chrysler Makes Progress, Creating Opportunity For Disaster

According to The Wall Street Journal, "Two major players driving the deal are JP Morgan Chase & Co. and Cerberus Capital Management. Cerberus owns Chrysler, while JP Morgan is one of the largest holders of Chrysler bank debt and is a key lender for GM."

The merger may be good for the financial parties, but it could be a disaster for GM. The largest US car company is focused on increasing its sales in emerging markets and re-tooling its American plants to build more fuel-efficient vehicles. The government is supporting this production initiative with $25 billion in loan guarantees for the Big Three.

What GM cannot afford is having its management spend the majority of its time integrating operations from a much weaker car company. Chrysler's sales have routinely been down more than Ford's (F) and GM's. Chrysler has a model line which has been dominated by SUVs, minivans, and small trucks. In many car buyer satisfaction surveys Chrysler is viewed as having the worst quality products made in Detroit. In the last American Customer Satisfaction Index conducted by the University of Michigan, Chrysler models turned in remarkably awful scores.

GM would be taking on a company which has a poor reputation with consumers.

The combined firm would also face the problem of whether it would retain all of its brands and all of its dealers. Killing brands may save some money, but it could also cause customers to defect to products from other car companies.

Chrysler is likely to fail at some point in the next year. As a private company in a desparate industry operating in a credit crisis it has no access to capital. GM would be better off buying its assets out of Chapter 11.

"Putting the two companies together would be a disaster." I agree!

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Discussion Starter #6
Phasing Chrysler out of existence?

12:30 PM on Thu Oct 16 2008

One plan: GM may absorb Chrysler

Possible scenario would eliminate rival, reduce excess capacity; pact similar to AMC purchase.

General Motors Corp. could swallow Chrysler LLC and end the Auburn Hills automaker's 83-year existence under one scenario being discussed by GM and Chrysler's owner, Cerberus Capital Management LP, said a source briefed on the talks.

Such a deal, similar to Chrysler's 1987 acquisition of American Motors Corp., would allow GM to pick up some of Chrysler's 2.7 million in annual sales -- while avoiding the bulk of Chrysler's costs, the source said.

GM, Cerberus and Chrysler all declined to comment.

Sources familiar with the negotiations say the talks still are in early stages, and many combinations are being considered.

Analysts say a deal along the lines of Chrysler's purchase of AMC, which eliminated Detroit's No. 4 automaker as an entity and all its brands except Jeep, would make sense for GM.

Such a deal would differ from the 1998 acquisition of Chrysler by Germany's Daimler-Benz AG, which left the U.S. carmaker operating intact as a separate division. Instead, Chrysler would be completely absorbed into GM and melded into its car making and other operations over time.

"That would be the likely scenario, if such a thing were to happen," said Aaron Bragman, an analyst at Global Insight.

Besides the Jeep brand and Chrysler's minivans, the company has few assets of value to its bigger rival, he said.

"For GM, the only reason to absorb Chrysler would be to eliminate a competitor," he said.

Many industry experts believe GM's interest in Chrysler, both now and in 2007, when DaimlerChrysler AG put the American unit up for sale, reflected its goal to reduce the excess capacity in the U.S. auto industry that has hurt all of Detroit's carmakers.

"The others (automakers) will be delighted to have Chrysler just die and take 1.5 million units out of the industry, which is about what the excess is," said Gerald Meyers, former chairman of AMC and now a professor at the University of Michigan.

Such a deal would surely worsen Michigan's economic woes, eliminating thousands more auto jobs in Metro Detroit, canceling contracts with suppliers and prompting more plant closures.

The source familiar with the negotiations told The Detroit News that GM could cut costs by eliminating much of Chrysler's staff and gradually shifting production of Chrysler vehicles to use more GM components.

Lincoln Merrihew, an analyst with TNS Automotive in Boston, said he didn't see the Dodge or Chrysler brands surviving if such a deal were concluded. "In the situation the Big Three face, you're looking for hard-core, quick economies of scale," he said.

At Chrysler's Auburn Hills headquarters, morale is bleak as employees fear huge job losses in any GM deal, while the top bosses installed by Cerberus are expected to leave with fortunes.

GM, struggling with huge losses and a liquidity squeeze, might use Chrysler's cash -- $11.7 billion at the end of June -- to close Chrysler dealers and some of its businesses, as well as shore up GM's finances, analysts say.

Sources close to the negotiations say Chrysler might survive -- or at least fare better -- in a three-way deal with the Renault-Nissan alliance.

But it is unclear whether the French-Japanese partnership still is interested in Chrysler.

Renault SA is in debt, and executives are studying whether Nissan Motor Co. has enough cash to comfortably afford a deal in this difficult economic environment.

Carlos Ghosn, the CEO of Renault and Nissan, is said to have been more inclined to do a deal with Cerberus a few months ago.

At GM, many top executives support acquiring Chrysler, but only in a deal like Chrysler's acquisition of AMC from Renault.

Renault agreed in 1987 to sell its 46.1 percent stake in AMC, and AMC's board sold the remainder to Chrysler in a $1.2 billion deal, the biggest merger in the U.S. auto industry at the time. Chrysler ended all of AMC's car lines, keeping only the Jeep brand.

In their discussions, GM and Cerberus also have looked at their shared ownership of GMAC Financial Services since 2006, when GM sold 51 percent to Cerberus. Cerberus wants to acquire the rest, but GM wants GMAC focused on its auto sales business.

This week, after GMAC's announcement that it would consider auto loans only for customers with high credit ratings many wondered whether Cerberus was putting pressure on GM.

At Cerberus, officials deny any ulterior motive. GMAC spokeswoman Gina Proia said the decision to increase credit requirements was a result "of the current market environment that has reduced access to funds and increased the cost of funds."

LINK:One plan: GM may absorb Chrysler | The Detroit News |

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Discussion Starter #7

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Discussion Starter #8
The United Auto Workers union has expressed concern about job losses that might stem from consolidating the two companies. Chrysler has more than 66,000 employees, the majority of whom are in North America.
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