×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

Tough going ahead for GM, Chrysler

Tough going ahead for GM, Chrysler
Comment E-mail Print Share
First Published: Mon, Feb 19 2007. 12 32 AM IST
Updated: Mon, Feb 19 2007. 12 32 AM IST
 It’s easy to imagine a finale to Daimler’s disastrous American road trip. Why not hand over its money-losing Chrysler division to the biggest car maker in the world — General Motors?
By crunching plants, models and brands, there would be huge cost savings. They might even create value for investors.
Trade publication Automotive News has reported that General Motors is in talks to acquire Chrysler from Germany’s Daimler, citing unnamed sources.
The report said high-level talks are taking place between GM and Daimler executives.
The two sides are already discussing a product development alliance, whereby Chrysler would potentially market some of GM’s large SUVs such as the Chevrolet Tahoe.
Here’s how a deal might work.
Daimler hands Chrysler over to GM. The two agree on a value for the business — something like $10 billion (Rs44,000 crore), give or take a few billion, depending on Chrysler’s liabilities.
In exchange, Daimler gets no cash, but a big stake in the combined GM-Chrysler.
Daimler is, after all, used to holding investments in public companies such as EADS, the defence concern. This gives it an option on a Detroit turnaround.
Daimler also hammers out an alliance with GM along the lines of the one Carlos Ghosn fashioned between Nissan and Renault—and tried unsuccessfully to bring GM into.
Because Daimler needs such an arrangement as much as GM, the Detroit automaker’s bosses would be in a position of equal strength in negotiating a deal. By combining procurement, purchasing and some other functions around the world, everybody wins.
Now comes the hard part—and the reason a deal might never get beyond an investment banker’s spreadsheet.
For a merger to work, GM and Chrysler would need to crunch costs like crazy.
Again, on paper, this is conceivable. There are overlapping brands, dealer networks, factories, operating plants and white collar workforces galore.
If they cut costs equal to 2% of sales—a common M&A metric—the savings, once taxed and capitalized, would be worth about $30 billion—roughly equal to the two car makers’ value. But pushing these cuts through won’t be easy.
For starters, neither of the firms has shown much stomach for eliminating brands, although with so much overlap in the sport untility vehivle (SUV) market between them, they’d have little choice.
Dealing with the fallout from the unions could be harder.
A merger would require firing many thousands more than the 13,000 staff Chrysler’s latest restructuring plans. Then there are the dealers.
Much as they grumble about Detroit pushing them to take in too many vehicles, they won’t relish having so much supply suddenly taken off the market.
That’s not to say a deal is impossible. But neither GM’s nor Chrysler’s executives have a reputation for successfully managing the nitty-gritty challenges a deal would present. Unless they can convince their shareholders otherwise, a merger looks like a long shot.
Comment E-mail Print Share
First Published: Mon, Feb 19 2007. 12 32 AM IST
More Topics: Corporate News | World Business |