Why Do GM and Chrysler Need Uncle Sam's Help?
Taxpayers are already being asked to bail out Detroit. Do they also have to play investment banker for a GM-Chrysler merger—as well as help out a private equity giant?
General Motors (GM) since September has been talking to Chrysler's majority owner, Cerberus Capital Management, about acquiring Chrysler (BusinessWeek.com, 10/17/08). GM management is convinced that acquiring Chrysler's $11 billion in cash, and then gutting the company of redundant jobs, will provide it with the revenue, cash flow, and cash reserves it needs to make it through 2009 and into 2010. Moody's Investor Service (MCO) this week downgraded GM's debt, and reiterated what other rating agencies have said: that GM will run out of operating cash next year without new sources of capital.
Pols Back Away from Funding Merger
GM, which lost $18.8 billion in the first six months of the year and still hasn't reported its third-quarter losses, is looking for quick help from the government. Sources familiar with the negotiations between the carmaker and the White House say GM is seeking $10 billion in the form of loans, which it claims it needs to acquire Chrysler. In exchange, GM, according to industry sources, has dangled the possibility of the government taking an equity stake in the new enterprise, as well as specifics on protecting a number of future jobs.
Even though the Treasury Dept.'s decision to spend $250 billion to buy stakes in small banks and other financial institutions received general approval from members of Congress, the idea of the government owning a stake in GM is not popular. "I haven't studied it," says Representative Barney Frank (D-Mass.) who is chairman of the House Financial Services Committee, adding that, "We'd all be skeptical of taking equity."
And overtly helping GM close a deal to take over Chrysler doesn't have a lot of cheerleaders either. Even Michigan's Democratic congressional delegation, which can be counted on to defend and promote the Big Three automakers, and who are not at all vulnerable in next week's election, are keen to structure a rescue package so that it is not seen to help the job-killing merger take place.
Dennis Fitzgibbons, chief of staff on the House Energy & Commerce Committee, which is headed by Representative John Dingell (D-Mich.), says his boss has never favored directly assisting GM to acquire Chrysler. "The congressman favors additional help to the industry, such as an expansion of the loan package to help offset advanced technology investments they have to make," says Fitzgibbons.
At a debate last week, Michigan's senior Democratic Senator, Carl Levin, was initially quoted as supporting a plan where the government helped the companies merge. But his office quickly issued a correction saying he was misquoted. Levin also supports expanded loans to offset technology investments being made by GM, Ford (F) and Chrysler to comply with tougher fuel economy standards.
UAW Support Is Crucial
Congress is looking to help all three auto companies, but, as one Capitol Hill staffer puts it: "The package is going to have to look right and smell right, and it is going to have to have the support of the UAW [United Auto Workers]."
The biggest sticking point is the almost guaranteed loss of some 35,000 jobs as a result of a GM-Chrysler merger. GM, says the same Hill staffer, is working out some promises on protecting a certain number of blue-collar jobs, though most of Chrysler's white-collar jobs would be lost.
UAW President Ron Gettelfinger has voiced his opposition both to a GM acquisition of Chrysler and to renegotiating the terms of the last labor contract, which resulted in the UAW taking over management of its own health care in exchange for GM funding the Voluntary Employee Beneficiary Association that would manage auto workers' health plans (BusinessWeek.com, 9/26/07).
Negotiations: What's on the Table
According to sources familiar with the negotiations between the automakers, the Bush Administration, and key members of Congress, the following help to the automakers is being discussed:
• The Federal Reserve and Treasury Dept. exercise the authority they already have to buy loans from automotive lenders like Ford Motor Credit, GMAC Financial Services, and Chrysler Financial. The Federal Reserve has $700 billion to $800 billion to buy loans from all sources. The Treasury can use some of its $700 billion from the financial bailout plan to do the same. This would enable the automakers to more easily make loans to consumers who are in the market to buy a new car.
• Assuming a deal is done between GM and Chrysler, Cerberus, which already owns 51% of GMAC Financial Services, would get a bigger stake in the lender. GM's 49% stake would be reduced. If GM's take is below 10%, GMAC could automatically become a bank holding company and get access to Fed funds. If GM owns between 10% and 33% of the lender, GMAC would need to apply for an exemption from the Fed to become a bank holding company and get access to its funds.
• Expand the government loan program signed into law in September that makes $25 billion available to the automakers and auto suppliers to offset investments in more fuel-efficient vehicles needed to meet new government fuel economy regulations. Automakers are looking for another $25 billion in loans and for the money to be made available by the end of the first quarter, or sooner, under an emergency provision.
There is a consensus among Wall Street analysts, government officials, and high-ranking auto executives that the federal government will not allow either GM or Ford to go bankrupt. "We don't see that scenario happening at all," said Goldman Sachs (GS) auto industry analyst Patrick Archambault during an investor call last week.
Bankruptcy "Not an Option"
Despite the fact that the companies could still operate in Chapter 11, there is a belief that consumer confidence in a bankrupt car company would be so shaken that Detroit would suffer an irreparable blow to its image and trust, making a recovery all but impossible. "An auto company filing Chapter 11 would be devastating to customer confidence in the brand…customers would peel off to healthier companies in a flash," says marketing consultant Dennis Keene. Said GM Vice-Chairman Robert Lutz on Monday: "Bankruptcy is not an option."
After years of downsizing, the three companies today employ about 200,000 people in the U.S. But the ripple effect, according to the Center for Automotive Research (CAR), reaches about 2 million jobs, including suppliers and dealers. Those jobs are concentrated in already devastated state economies of politically important Michigan, Ohio, Indiana, and Illinois.
Chrysler is another matter. Though it has about $11 billion in cash, the company reported last August, analysts believe there is no long-term plan for the company staying independent. "Chrysler is fairly hollowed out," says Dr. David Cole, chairman of CAR.
But there is considerable disagreement outside the halls of GM and Cerberus about whether GM actually needs Chrysler to survive. "GM is looking to put together huge economies of scale, which will lower its costs going forward, but it is only one scenario, not the only one," says Cole.
Excess Capcity Would Be Everywhere
A combined GM-Chrysler would control roughly a third of the U.S. auto market. But it would face enormous pressure to restructure rapidly and immediately cut costs stemming from excess capacity in almost all facets of the business. Those would include an unwieldy stable of 11 brands, more than 10,000 dealers, and 97,000 union-represented factory workers.
Indeed, GM may be lobbying Congress for help to acquire Chrysler for its own good, but it is also doing Cerberus a favor by taking Chrysler's automotive operations off its hands. Part of the deal being worked out by GM and Cerberus has the private equity firm acquiring some of GM's 49% stake in GMAC at a friendly price, while GM absorbs the liabilities of Chrysler's troubled vehicle business and its employee and retiree expenses. "There is no question that Cerberus wants out of the auto business and to remain in the financial-services business," says one industry source, a consultant close to Chrysler executives.
That leaves the White House, the next President, and Congress to decide how it will help the automakers stay in business. In the end, the money needed may come from three or four different sources in the forms of loans and lowered borrowing costs facilitated by the government. In that scenario, GM may manage to use the boost to its cash flow and liquidity—one formula pitched by GM is $5 billion in advanced loans to build greener cars and $5 billion in liquidity for its GMAC unit—to pull off the acquisition of Chrysler it feels it needs, without the federal government being seen as GM's investment banker. As one Capitol Hill source with knowledge of the negotiations said: "Money is money, however they get it."
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