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GM-Chrysler? Oh, never mind!

GM said Detroit would go under unless it could buy Chrysler. Then it had second thoughts.

November 7, 2008: 3:11 PM ET

NEW YORK (Fortune) -- These are strange and horrible times for Detroit, even by the standards we've become accustomed to, as the Detroit Three (formerly Big Three) automakers continue to waste away. In the latest twist, General Motors, one of the Three, had been saying privately that Detroit would collapse unless Washington gave it billions to help it buy Chrysler, the smallest of the Three. But then GM put the deal, supposedly so vital to the future of Detroit, on hold. If you look at the numbers, you can see why.

The pitch was that unless GM (GM, Fortune 500) got to buy Chrysler, the jobs of their combined 145,000 U.S. workers and the futures of their 682,000 retirees and spouses were at risk. What's more, the jobs of millions more workers and retirees at firms that supply goods and services to the U.S. car companies would be at risk too.

Despite the warm-and-fuzzies about saving jobs, GM and Chrysler were really trying to salvage something for their owners - and will probably try again, provided GM can survive the next few months.

GM said Friday it could run out of cash by year-end, absent an improvement in its fortunes. It won't discuss the "b" word, but I think that if it goes into bankruptcy, its shareholders will be wiped out.

Meanwhile, Cerberus, the once-infallible alternative investment shop, has stuck its investors, who own 80.1% of Chrysler, with a holding that the financial markets value at little or nothing. (Cerberus declined to comment.) That's based on the fact that Chrysler's senior bank debt currently trades at less than 50 cents on the dollar and because Chrysler's other owner - Daimler (DAI), formerly DaimlerChrysler - recently revalued its 19.9% Chrysler stake down to zero. (Sure, a minority stake is worth proportionately less than a controlling stake - but zero is a pretty daunting number.)

Let me show you why I think GM, which has been hemorrhaging more than $2 billion of cash a month, decided to deal with its liquidity problems now rather than pin its hopes on buying Chrysler.

The problem, as they say, is that Chrysler's assets are all tied up in debts, and the last thing GM needs is more borrowings on its pathetic balance sheet. Chrysler owns valuable assets, such as its Jeep and minivan businesses. But it also has at least $9 billion of debt - I say "at least" because $9 billion of loans have been publicly identified, but there may be more debts that we don't know about. Cerberus won't disclose Chrysler's balance sheet.

Cerberus, which got its controlling stake in Chrysler two years ago in return for investing $7.4 billion in the company, has shrewdly been trying to salvage something for its investors by whipping up a bidding war (or the illusion of one), pitting GM, Nissan (NSANY), and who knows who else against one another.

Chrysler had $11.7 billion in cash as of June 30, according to an August news release. That's nice. However, the release said, $2.3 billion of that cash was restricted. So the net cash was only $9.4 billion, not much more than Chrysler's publicly identified debt.

GM was running around asking for government-backed loans of at least $10 billion to facilitate the deal. In other words, GM would have gotten $9.4 billion of cash (assuming Chrysler's cash situation hasn't changed since June 30) in return for taking on $10 billion of acquisition debt and presumably assuming Chrysler's $9 billion (or maybe more) of existing debt.

As part of the deal, GM was supposed to turn over to Cerberus some or all of its 49% stake in GMAC, its once-highflying finance subsidiary that has fallen on hard times. Adding $19 billion of debt and forking over a presumably valuable holding is a stiff price to pay for 80.1% of an underwater asset.

General Motors' secret sauce was that it was going to deftly fold Chrysler into GM, saving more than $6 billion a year at the combined company, which would have enough staying power to hold on until the auto market revives. The plan looked great on paper - but then again, GM's plans always look great on paper. It's in the real world that the trouble starts.

GM's management has repeatedly proclaimed that turnarounds are at hand, only to have them vanish. Think these folks could successfully integrate two troubled companies and rationalize their product lines? You make the call.

Then there was the financial elephant in the room. No, it's not the GM and Chrysler pension funds. Those funds are in good shape - or at least were before the October market meltdown.

The problem is the cash GM and Chrysler need - and soon - under terms of the grand bargain the Detroit Three made last year with the United Auto Workers about health care for retirees. GM, Ford, Chrysler, and the UAW agreed to have health-care trusts assume responsibility for retiree health care. In return, the companies promised to turn over billions to the trusts. The amount, while huge, was way less than the cost at which those benefits were carried on the companies' books. Capping the retiree-health liability seemed to promise the companies long-term salvation.

But, boy, is there a near-term problem. By my math, GM and Chrysler have promised to give the trusts a total of $12.5 billion to $18.1 billion in cash - maybe more - by early 2010. That's above the $16.8 billion currently in the trusts.Good luck coming up with that money, guys. Or trying to get more givebacks from the UAW.

GM and Chrysler would almost certainly stop paying retiree health care if they go into bankruptcy before the end of next year. That would be devastating - and it is a major reason I don't think that bankruptcy would be a good thing.

Despite the fact that the numbers don't seem to work, I expect the deal to revive and for Uncle Sam to come across with subsidized loans. Why? Because holding hostages can be an effective strategy. Which departing Bushie or incoming Obamayan dares to risk letting big parts of America's remaining industrial base collapse on his watch?

But I hope that, in return, the government makes all the parties give up something, the way it did when it guaranteed loans for Chrysler in 1979. The government should make workers and retirees pick up part of the tab, it should get Cerberus to put in additional capital, it should install new management, and it should get most of the stock in "New GM." If taxpayers are expected to help save Detroit and bail out a bunch of private equity guys, we ought to get paid for it.

LINK:GM-Chrysler? Oh, never mind! - Nov. 7, 2008

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A message to employees

A message to employees from Bob Nardelli

Nov 7, 2008 at 12:38 pm in Company News, Messages From Our Leaders

Dear Colleagues,

Today GM released its third-quarter results, which included the following statement I wanted to share with you:

“In addition, we have recently explored the possibility of a strategic acquisition that we believed would generate significant cost reduction synergies and substantially strengthen our financial position in the medium and long term, while being neutral or modestly positive to cash flow even in the near term. While the acquisition could potentially have provided significant benefits, we have concluded that it is more important at the present time to focus on our immediate liquidity challenges, and, accordingly, we have set aside consideration of such a transaction as a near-term priority. We frequently discuss matters of mutual interest with other auto manufacturers and, as a matter of policy, we generally do not comment on these private discussions, which in many cases, do not lead anywhere.”

As we have previously stated, Chrysler LLC neither confirms nor discloses the nature of its private business meetings, as many times they do not come to fruition.

Returning Chrysler to profitability continues to be the key focus of the management team. We are significantly challenged by today’s economic environment and by the automotive industry’s unprecedented downturn. As an independent company, we will continue to explore multiple strategic alliances or partnerships as we investigate growth opportunities around the world that would aid in our return to profitability.

As we’ve shared, we appreciated the opportunity to meet with House Speaker Nancy Pelosi and her leadership team, as well as with Senate Majority Leader Harry Reid to discuss the challenges facing the industry. We are encouraged by their understanding of the importance of the automotive industry to the economy, and we look forward to working with them on these issues. We would also like to acknowledge that UAW President Ron Gettelfinger was present at these meetings and added his support.



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Will Obama Bail Out GM, Chrysler and Ford?

Will Obama Bail Out GM, Chrysler and Ford?

November 7, 2008 @ 5:38 pm In Deal Politics | 16 Comments

Will it or won’t it?

It is the question swimming around the Big Three U.S. auto makers. Will the federal government give them a bailout? The auto makers, particularly General Motors, have been begging the government for quick disbursement of the $25 billion of loans and they seek more. GM chief Rick Wagoner has been making the rounds of Congressional and Bush Administration officials to talk about the industry’s need for help; one of his advisers, former Treasury official Roger Altman, has been kicking up some dust as well.

And as GM and Ford Motor continue to post massive losses, the windows keep closing for options, such as the now-called-off GM-Chrysler deal. Today, GM warned it “estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business.” The company would find it prohibitively expensive to borrow, even if it could pay it back. The auto maker also abandoned plans to merge with Chrysler. And Wagoner wasn’t afraid to invoke the precedent of disastrous bankruptcies today on CNBC: “Letting GM go is a terrible idea. Look at the effect of Lehman Brothers.”

Enter President-elect Barack Obama. His first press conference included encouraging signs for the auto makers and their efforts to get government help

Here is what Obama said:

The auto industry is the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil. I would like to see the Administration do everything they can to accelerate the retooling assistance that Congress has already enacted. In addition, I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis, and succeed in producing fuel-efficient cars here in the United States. I have asked my team to explore what we can do under current law and whether additional legislation will be needed for this purpose.

But read between the lines: While it’s certainly nice that Obama called the auto makers “the backbone of American manufacturing,” Wagoner & friends might be in for a rude awakening unless they come around to Obama’s way of thinking on producing more fuel-efficient cars.

After all, the auto makers have long resisted the call to make more fuel-efficient cars. And while the $25 billion of federal low-cost loans were intended to help the auto makers retool to produce smaller, greener vehicles, the auto makers, especially GM, would like to use that government money for other priorities.

So were Obama’s words a prelude to negotiation, or a Hobson’s choice? The auto makers can’t wait ’til inauguration day to find out.

Deal Journal - : Will Obama Bail Out GM, Chrysler and Ford?
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