GM Buying Chrysler: Why It Could Make Some Sense
After a week of stating in this blog and on the air that I don't see the logic behind a combination of GM and Chrysler, I took the last two days to ask people familiar with the talks and inside the auto industry if I'm missing the boat.
In other words, does GM swallowing Chrysler make sense?
The consensus: It makes sense on paper, but whether GM could execute this merger is very much in doubt. Here's why it might work.
Chrysler comes with $10 Billion in cash and the automaker's parent, Cerberus Capital, might pay GM another $3 Billion to unload the operation. So GM could get Chrysler and $13 Billion in exchange for Cerberus taking an equity stake in GM.
With that money, GM now has a lifeline at a time when it needs cash to make it to 2010 when it's costs will drop and a slew of new models are expected to help the bottom line.
It's estimated GM would likely wind up spending $5-6 Billion to eliminate much of Chrysler's back office operation and hourly work force. If that's true, GM still comes out with an extra $7-8 Billion and in the process has eliminated a competitor.
So why are some skeptical that even if GM pulls off this deal, it will struggle with the integration of Chrysler? Mainly because combining automakers is not easy, nor does GM have the best record when it comes to executing acquisitions. For every success story like GM buying Daewoo, there's a cautionary tale of GM's messy marriage with Fiat. This is why one person in the auto industry said to me, "These guys are smart enough to put this deal together, and dumb enough to screw up it's execution."
And the execution issues are numerous: Fighting the UAW in eliminating hourly workers, how to cut into a dealer network that will swell to roughly 10,000 in the U.S., and can GM quickly kill off the Chrysler and Dodge brands while presumably keeping Jeep. And GM would be trying to do all this while the U.S. struggles with one of it's worst economic slumps in years.
So you tell me, does this deal make sense for GM?
- Analysts Slash Oil Price Forecasts as Demand Falls
Click on Ticker to Track Corporate News:
- Ford Motor
- General Motors
- Honda Motor
Questions? Comments? BehindTheWheel@cnbc.com