Global Insight Perspective | |
Significance | Reports over the weekend have indicated that private equity firm Cerberus Capital Management is stepping up efforts to sell Chrysler sooner rather than later, with GM seemingly inching closer to a deal to acquire its cross-town rival. |
Implications | It is believed that GM is interested in Chrysler as a short-term solution to helping its own liquidity; Chrysler supposedly had US$11 billion on-hand at the end of June, and a deal to take over control of Chrysler could potentially come with additional billions cash incentive from Cerberus. |
Outlook | Any GM takeover of Chrysler would effectively mean the end of Chrysler as it exists today; the need to cut costs dramatically in order to allow GM to use the cash previously slated for Chrysler's own operations would see a necessary breaking up and shutting down of much of the company's operations. |
Developments continue to unfold in the ongoing quest to find a new owner for Chrysler, according to numerous reports published over the weekend and sources close to Global Insight. Reports have begun to surface suggesting that the company's current owners, Cerberus Capital Management, is desperate to unload the struggling automaker before the U.S. market collapses any further. Sources close to the situation have been quoted by several news media outlets as saying that pressure is being ratcheted up on Cerberus by its lending banks to unload Chrysler as quickly as possible, as confidence in the company's ability to recover has been badly damaged by the recent collapse of the U.S. auto market. The current focus is on General Motors (GM) as the likely candidate for acquiring at least some of Chrysler, with one source close to Global Insight claiming that a "deal is all but done" between the related parties. Renault-Nissan is frequently mentioned as a possible second interested party. Neither Chrysler nor GM has commented on the likelihood of such a deal, but all are thought to be hurrying to complete such an arrangement before the 5 November U.S. election, just 16 days away.
Word has come to Global Insight that GM has retained an anti-trust lawyer to examine the possibility of acquiring all or part of Chrysler, but that the company is truly only interested in Chrysler for a short-term injection of liquidity. Chrysler reportedly had US$11 billion in cash at the end of June, money that GM would desperately like to have access to in order to bolster its own highly strained finances. In terms of Chrysler's assets, GM is reportedly only interested in a handful of them: the Jeep brand, the company's minivans, and the more recently updated flexible manufacturing plants, including the one in Belvidere (Ohio) and Detroit's Jefferson North Assembly Plant (JNAP).
Outlook and Implications
The rampant speculation surrounding the future of Chrysler is practically reaching fever-pitch in and around Detroit. It must be said that most reports in the media are currently mere speculation, but a few pieces of information seem to be holding true between several different sources. Foremost is that Chrysler is almost certain to be sold by Cerberus at this point; the company's continual slide from the time of Cerberus' purchase and the apparent lack of an ability to stem its sales decline anytime before 2010 makes the next 18 months of continued economic downturn seem frankly not do-able for Cerberus. The only question now in most people's minds is not if Chrysler will be sold, but to whom, and when. The "when" question also seems to be rapidly resolving itself; if media reports and Global Insight sources are to be believed, then a deal is already all but done between GM and Cerberus. The parties are seemingly anxious to have a deal finalised before the end of the year, if not before the end of the month. But as far as reports go, Cerberus has yet to finalise the acquisition of the remaining 19.9% of Chrysler that it does not already own from Daimler. This is likely to be necessary before Cerberus can transfer ownership or break up the company, as Daimler has already stated that it wants no part of being involved in selling Chrysler to a third party.
The larger question also looms: what will happen to Chrysler is if it is purchased by another company? This will depend entirely on who purchases Chrysler, or more accurately, what part of Chrysler that entity purchases. It now seems likely that Chrysler will not be sold whole; increasing reports indicate that it may be broken up into various components and sold off piecemeal. But basically, there are two scenarios that would involve a transfer of ownership: a sale of the entirety to GM, or a break-up of the company, with part going to GM and part to a foreign automaker. Under the first scenario, GM would take control of Chrysler, and likely have to give up the remaining 49% ownership of GMAC to Cerberus. The primary reason for GM undertaking such a scenario would undoubtedly be to seek a short-term liquidity improvement for GM—the company reportedly wants access to the US$11 billion (at most) that Chrysler had on hand at the end of June. How much of that money is still left is unknown, but with GM currently having US$21 billion on hand, a burn rate of US$1 billion a month and accelerating, the need to have US$11-14 billion on hand just to keep operations going, and an increasing inability to find new sources of liquidity, acquiring Chrysler just to get at its cash hoard begins to make short-term sense.
However, this scenario would undoubtedly mean the end of Chrysler as it is today. Chrysler needs its cash for its own operating expenses; if GM intends to use that cash for its own survival, then Chrysler's operations would have to be either resold to a third party or simply shut down. This in and of itself would be an expensive proposal—it cost GM between US$1-2 billion just to end its Oldsmobile brand in the late 1990s, and the spectre of that experience is the main reason why GM has not shut down more of its brands. A GM takeover of Chrysler would necessarily result in massive layoffs, elimination of departments—a combined company would not need two engineering departments, for example—and even the possible closure of Chrysler's massive Auburn Hills technical centre headquarters. The Jeep brand would be likely to be packaged with Hummer and resold. The resulting effect on the Michigan economy would be devastating; already in the fifth year of what many call a "one-state recession", Michigan can ill afford to lose the thousands of blue- and white-collar jobs that a shut-down of Chrysler would bring. Chrysler has 33,000 blue-collar employees, and thousands more white-collar salaried positions. Its headquarters is the sixth largest building in the United States, at over 4.4 million square feet, and no other tenant would be likely to be able to fill it. The state's unemployment rate is at 8.9%, and would certainly go higher if Chrysler were to be absorbed by GM. From a short-term strategic move, it may be GM's only option in a time of upheaval and desperation, but the results are likely to look ugly. And this does not even touch upon the effects to the supplier community of a Chrysler shut-down; a ripple would be likely to sweep through the supplier community like a tidal wave, forcing further layoffs, consolidations, and acquisitions in an industry that is already facing massive financial hardship.
The other scenario for the sale of Chrysler would involve more than one party. GM may want only Chrysler's cash, minivans, Jeep brand, and flexible manufacturing plants, but Chrysler's other assets would have value for a foreign automaker looking to gain a foothold in the North American market. Names have surfaced like Renault or Tata, but both have denied being involved in the current negotiations. Renault has expressed a desire to revisit the U.S. market, but finding the right way to do that is still a challenge. Purchasing a stake in Chrysler, possibly several plants, maybe a portion of the dealer franchise rights, test centres, even headquarters buildings, would give Renault or Tata a ready-made foothold in the United States complete with distribution and sales network. But if the current spate of reports from various media outlets and contacts are to be believed, the current plan seems to be a sale to GM.