On-Again, Off-Again GM-Chrysler Merger Talks Are On Again
The Wall Street Journal reported today that the merger talks between GM and Chrysler – which have been publicly acknowledged at least three times by my count – have again restarted. Though neither company has yet commented on the development, the Journal cited the usual “people familiar with the matter” when reporting the story.
The closest the companies have probably come to merging was in October, when GM COO Fritz Henderson was leading a team to explore the purchase of Chrysler from Cerberus, only to disclose with the release of some ugly third quarter 2008 financials a few weeks later that the company was abandoning the pursuit to focus on near-term liquidity challenges. During the automakers’ Congressional testimony, CEO Rick Wagoner of GM and Bob Nardelli of Chrysler agreed to reconsider the possibility of a merger, particularly if it was a condition of receiving government assistance.
According to the latest WSJ report, Cerberus wants to get rid of Chrysler at nearly any cost – which we’ve also covered previously – but Cerberus’ desperation and/or exit strategy from its failed forays into the auto industry may be coming into sharper focus. Because Chrysler is privately-held by Cerberus, and theoretically could just receive a capital infusion from its owner’s deep pockets rather than the taxpayers, some in Washington were more amenable to helping GM than they were toward helping Chrysler.
Apparently, the concession that Chrysler’s owners at Cerberus are willing to make at this point is to basically give away part of Chrysler in an effort to solidify the shaky balance sheets of Chrysler Financial (which it owns 100% of) and GMAC (which it owns 51% of). Cerberus would like to combine the operations of the two finance arms to achieve economies of scale. In other words, Cerberus wants to stay in the financial services business, where it likely has more expertise, and get out of the car business, where it does not.
As we noted yesterday, a potential GM merger is not the only thing keeping Bob Nardelli and his bosses at Cerberus up at night these days. Chrysler Financial, itself struggling mightily and trying to reorganize itself to become eligible for a TARP cash infusion from the government, has sent a letter to dealers that will likely cause numerous dealers to throw up their hands and give up their franchises in 2009. In the letter, Chrysler Financial explains that as dealers – rightfully concerned about the viability of Chrysler Financial – are withdrawing $60 million per day from a fund that dealers fill with their own money to pay off loans that they take out to stock their lots with new vehicles, and pleaded with dealers to stop making the withdrawals or it will be forced to cease floorplan financing. However, an even more onerous piece of news for dealers from Chrysler Financial is that the company is taking on hugely expensive charges for dealers who hold cars in inventory beyond certain time limits. Starting January 1, dealers will have to pay 10% of the amount that they owe on any 2008 model vehicles more than 360 days old and 50% of the amount of any 2009 model year vehicles that are more than 360 days old. Chrysler Financial will also assess monthly charges of $10 for every new car that is unsold after 180 days, $15 for each new car unsold after 270 days, and $25 for each vehicle over 360 days.
Believe it or not (and unfortunately, I believe it), many Chrysler dealers have new vehicles sitting on their lots for longer than a year. The new fees will add up to tens of thousands of dollars per year for even small dealers. Many dealers are reacting to the new charges by slashing prices on old inventory to clear it out by the end of the year so they’re not hit with the fees – even to the point of taking a loss on the sales, because they’ll lose money anyway once the charges that begin in January 2009 start accumulating.
Although Chrysler, like GM and Ford, would like to reduce its dealer count, it certainly doesn’t want to do so through gut-wrenching steps and bankruptcies. Nor does it want to see its dealer count dramatically cut in size, becuase doing so would leave it without enough outlets to peddle its wares, killing revenue, killing cash flow, and killing the company. It’s not looking good, folks.
Update: Moments after posting this, I noticed that GM has completely denied that it has restarted merger rumors with Chrysler, saying that nothing has changed since it last announced that the talks were off back on November 7. So perhaps the WSJ’s “people familiar with the situation” weren’t as familiar as they thought they were, or perhaps the companies are trying to keep a lid on potential discussions for now.