Why GM Is Serious About Buying Chrysler

Outsiders have been skeptical that GM is really interested in acquiring its smaller rival. But sources say both sides are giving the deal careful consideration

When news broke on Feb. 16 that General Motors (GM) could be interested in buying Chrysler from its German parent DaimlerChrysler (DCX), most industry watchers hated the idea. Longtime industry watcher John Casesa, who is now a partner in the consulting firm Casesa Shapiro, said he also couldn't see the logic. Former Chrysler President Thomas Stallkamp called it "lunacy" (see BusinessWeek.com, 2/20/07, "Kicking the Tires at Chrysler").

But get this: Both sides are serious about it. Two sources close to the situation say that both companies are very interested in exploring a deal, and both have discussed the prospect internally. Daimler management is open to an easy way out of Chrysler's problems, and GM sees plenty of advantages in snapping up its 80-year-old rival, the sources say.

In the three business days since DaimlerChrysler Chairman Dieter Zetsche floated the idea that he was open to divesting Chrysler, GM has looked at the benefits of a deal, and the company's board of directors already has been consulted, the sources say.

While a deal of this magnitude will be difficult to pull off, and a sale may not happen, the serious nature of the talks raises a big question: What does GM see in a troubled company such as Chrysler? The smallest of the traditional Big Three carmakers has plenty of problems, including the loss of $1.4 billion last year and announced job cuts of 13,000.

Combining Operations

One clear implication is that buying Chrysler would add sales of 2.65 million cars a year to GM's 9 million, keeping it way ahead of a surging Toyota (TM) in the race to remain the world's No. 1 automaker.

But there are potential benefits beyond the nearly meaningless sales crown. GM could merge operations so that the combined company would add Chrysler's $62 billion in revenue, plus such plums as the Jeep brand, the Chrysler 300, and the minivan franchise. GM would pull all of that in, without most of Chrysler's overhead. Says Jim San Fillippo, a consultant with Automotive Marketing Consultants: "They look at this as getting all of Chrysler's market share and just a little of its structural cost."

Then GM and Chrysler could combine engineering of vehicle platforms and thousands of parts, systems, and engines to save billions in a way that DaimlerChrysler never did. One Chrysler executive, who asked not to be named, said that talk of sharing whole vehicle platforms between Chrysler's brands and Mercedes is practically verboten. At a press conference on Feb. 14, where DaimlerChrysler announced that it was cutting jobs and considering all options for Chrysler, Zetsche said Chrysler and Mercedes would share engineering but not platforms.

More Layoffs Likely

One can imagine a combined company that merges back-office departments such as legal, purchasing, information technology, and public relations. GM could potentially bring Chrysler's design and engineering groups in, but both would be slimmed-down versions. That means a wide swath of Chrysler's 18,600 white-collar workers might be gone, as either Chrysler workers or their GM counterparts are let go to eliminate redundancies. With former Chrysler President Robert Lutz as its own vice-chairman of product development and having hired a handful of Chrysler stylists in the past couple of years, GM already knows Chrysler's designs pretty well. Casesa hyperbolized that "all of Detroit would be laid off."

Acquiring Chrysler may not be so outlandish for GM. The auto giant already figures that it can save billions just by sharing vehicles among existing members of its own far-reaching global empire. GM is finally coming together as one global company, using models developed in one market (say, Europe) and selling versions of it around the globe the way Honda (HMC) and Toyota do. GM's new midsize Saturn Aura shares many parts with the European Opel Vectra.

The principle would be similar with an acquisition of Chrysler. The deal would add a huge chunk of revenue to GM, and, if merged smoothly, there would be additional cash flow and profits to help fund its huge retiree health-care liabilities. GM would also inherit the $22.6 billion in health-care liabilities that come with Chrysler's 98,200 retirees. But the logic is that Chrysler has 1.4 retirees for every worker and GM has 3.8 pensioners per staffer. So the added cash flow from a leaner, meaner Chrysler would make it easier to fund both liabilities. Both companies have overfunded pension plans.

But if the deal is so promising, why not just do it?

Execution Challenges

First, GM sees logic for the acquisition on paper. But getting it to work will be incredibly complex and will come with its own set of challenges. "It only makes sense to the extent that GM could keep the sales," Casesa says. "To keep the sales, you have to have strong product." Chrysler doesn't, at the moment. GM would have to jump in and try to bolster the vehicle lineup.

Then, says Casesa, GM would have to sprint to seize the benefits of absorbing Chrysler. "You'd have major overlap," Casesa says. "You'd have to move fast and take overhead out very quickly."

The biggest hurdle will be the United Auto Workers union. Stallkamp, the former Chrysler executive who is now a partner with the private equity firm Ripplewood Holdings, says that the two companies would have to consolidate plants—especially those that make trucks and sport-utility vehicles—to make a merger pay off. That might mean big job cuts, and they would come after the UAW has already made big concessions to GM, Chrysler, and Ford (F) this year and last. The union has agreed to cut more than 85,400 jobs at the Big Three through buyouts and early retirement deals.

Says Stallkamp: "It would require a huge deal with the UAW." The union could quash any deal by refusing to go along with it and threatening to strike.

Expensive Buyouts

GM would also get Chrysler's bloated dealer system. Chrysler has already said it needs fewer than the 3,400 dealers it has. But getting rid of them is expensive.

GM wouldn't need many of those dealers, Casesa says. "There's a Chrysler dealer across the street from every GM dealer," he says. But state franchise laws make it difficult to get rid of them. So GM would have to buy them out. GM paid well over $1 billion to get rid of Oldsmobile a few years ago, and a big chunk of the cost came from buying out dealers.

That means that however the deal is done, it has to be a very cheap purchase for GM, because the company will need cash to fix many of the problems. Daimler paid $38 billion for the company, and even though management is eager to relieve pressure from shareholders and unload it, selling Chrysler at a fire-sale price will be an embarrassment for the Germans.

Other Possible Bidders

There is also the possibility that GM could be outbid by another player. Renault-Nissan (NSANY) is an obvious choice. Its chief executive, the aggressive Carlos Ghosn, has the cash to acquire and the desire to add a North American leg to his French-Japanese alliance. Chrysler would give him the minivan and truck presence he needs, plus the Jeep brand.

A source in the Daimler camp says that there are several interested parties. News reports from Europe say Korean automaker Hyundai is keen to make a bid. So Zetsche may have many options besides GM.

In any case, it's looking more and more like Chrysler's nine-year marriage to Daimler is headed for divorce. Says San Fillippo: "Given the state of the industry, you have to expect the unexpected." Anyone interested in a Buick 300?

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