GM-Chrysler Merger Talks on Hold Until After Election, as Bush Administration Won't Finance Buyout

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Researched by Industrial Info Resources (Sugar Land, Texas)--In-depth talks between General Motors Corporation (NYSE:GM) (Detroit, Michigan) and Chrysler LLC (Auburn Hills, Michigan) have reached an impasse and will be placed on temporary hold until after the November 4 elections, as the Bush administration has opted not to finance the merger of the two automotive giants. GM and Chrysler had been asking the Bush administration for $10 billion-$15 billion in government aid to help finance the merger; however, that aid was denied late last week. In the meantime, Cerberus Capital Management LP (New York, New York), the private equity firm that owns the majority of Chrysler, will reopen talks with other potential suitors who may be interested in acquiring the ailing automaker.

A merger between GM and Chrysler would provide GM with a much-needed influx of cash that the automaker would use to remain afloat throughout most of 2009. GM is currently burning through an estimated $1 billion a month in operating expenses, which, if the automaker continues to spend at this rate, will liquidate its cash reserves by next summer. Chrysler's estimated $11 billion in cash reserves makes an attractive incentive for the merger; however, if the merger does occur, a whole other set of problems will immediately need to be dealt with by GM.

First and foremost, GM will have to eliminate at least 34,000 Chrysler jobs and close at least half of the newly acquired plants. Included in the trimming would be almost all of Chrysler's models, most of which would become redundant in the new structure. Essentially, Chrysler would cease to exist if this merger is pulled off. On top of the job and plant cuts, GM would have to deal with the thousands of dealerships that would need to also be closed or converted to GM. However, with the automotive sales market slumping as it has been for all of 2008, closure will be the only option.

Even if the merger occurs, GM will still need to continue with its own program of closures and layoffs, as it has been for the last two years. GM is grossly overbuilt when it comes to its plant infrastructure, and that will have to be fixed regardless of what happens with Chrysler. This will mean tens of thousands of additional job cuts as well as numerous plant closures on the GM side of the equation. While acquiring Chrysler will help postpone the inevitable for as long as a year, the cuts will still have to happen if GM wants to become profitable again.

GM is desperate. The company needs cash badly -- so badly that it has been shopping the Hummer brand as well as its headquarters building in Detroit, but has not found willing buyers. The acquisition of Chrysler may be a last hope for the automaker to remain solvent. GM has lost almost $19 billion in 2008 and close to $60 billion in the last two years. If it cannot find a fast supply of cash to continue its rebuilding program, a full governmental bailout or even bankruptcy may be the only options.

Decades of mismanagement and poor planning have led the automotive giant to this state. It has dug itself into a massive hole, and the prospects for a happy ending are not bright. If this merger occurs, GM will employ more than 200,000 workers in North America and operate 22,000 dealers. In order to succeed, those numbers will have to be significantly reduced, possibly by as much as half before it is all said and done. As unfortunate and ugly as they are in such a seriously troubled economy, the steps are necessary for survival and when it comes down to it. The choices are job cuts, plant closures or bankruptcy, and pink slips will be delivered in droves. With the federal government knee deep in its financial bailout program for Wall Street there simply may not be enough cash to go around when it comes to saving the automakers from this situation of their own making.

Industrial Info Resources (IIR) is a marketing information service specializing in industrial process, energy and financial related markets with products and services ranging from industry news, analytics, forecasting, plant and project databases, as well as multimedia services.