Why GM + Chrysler = Ugh

Several news sources are reporting that GM and Chrysler are getting closer to a deal (see GM, Chrysler Merger Talks Accelerating or GM and Chrysler Step Up Talks).

For reasons that I detailed in my previous post (see A Disastrous Deal), this does not strike me as a sound strategic merger. Again, I’m  not a big fan of combining two failing firms in the hopes of creating one healthy one. All you end up with is one larger bad firm instead of two smaller bad firms.

What’s more, the aforementioned news sources are both reporting that GM and Chrysler creditors are supporting the union. For example,

JP Morgan Chase, a big holder of Chrysler bank debt, is also pushing for the deal…

…the two sides are seeing strong support from banks and other potential lenders that are eager to see a deal done… (quote via Calculated Risk)

Of course lenders are supporting this deal. Any deal decreases the chances of default - not because the combined entity will have a stronger balance sheet and/or a stronger business model, but simply because it creates an entity that the government will likely deem “Too Big to Fail”!!

I find it sad that preferential treatment of this sort may be motivating this deal.

Disclosure:  No positions.

Comments

[Joe Friday:]

I can certainly understand why the GM creditors may support a deal since they will have access to the Chrysler cash that would find its way to the combined company balance sheet, but I cannot understand why the Chrysler debt holders would feel the deal would benefit them... For that matter, would they not typically have a right to call for the return of their deb? I would have thought that most debt instruments would provide for convenants against combinations that reduce their security?

2008 Oct 17 04:42 PM

[Pfloyd234:]

Look at Sirius and XM! Look at the combined company's shares now!!

2008 Oct 17 10:47 PM

[H.J. Huneycutt:]

I think you hit the nail on the head with the last sentence. The only rationale for this potential merger that I can discern is that GM thinks this will make the government more likely to bail them out.

2008 Oct 17 11:46 PM

[Steven Hansen:]

i would not look at sirius and xm as it is a different industry. i see no synergy between these companies either. but the logical end for chrysler is bankrupcy as it is now too weak to survive long term (it will go the way of nash and packard). if absorbed into gm, maybe something can be salvaged.

2008 Oct 18 12:19 AM

[Deweyp:]

Your last paragraph says it all, the deal will reduce the chances of either company failing. You say you are not in favor of the merger, so what would you prefer, both companies failing? How on earth would that be better? By some estimates the American auto industry supports something north of 2 million well paid jobs in the US. Most critics of our government and the bailout decry the fact that medicare and social security funds are in jeopardy. How much more will they be indebted if we allow the auto industry to fail? The turn around is in progress and these companies will be self sustaining and profitable very soon. I believe they should be helped in any possible. America will benefit big time in the long run.

2008 Oct 18 10:03 AM

[Paul Killinger:]

GM and Chrysler are two very different car companies, and have a much better chance of surviving alone than in combination.

But you hit the nail on the head about why their bankers are pushing for a "Too Big to Fail" type of merger. Who knows MORE about this practice than the BANKS, who would ALL be out of business if it weren't for the largesse of the government in the name of America's reluctant taxpayers.

Great point! Thanks.

2008 Oct 18 10:32 AM

[grndude40:]

I think this is the most stupid thing i have ever heard. GM is too poor to survive so they want to buy Chrysler and basically shut it all down besides minivan & jeep; for their $11 billion in cash. I knew Cerebus would have done this since they like to ruin companies. They better not merge or else I will not buy a GM/Chrysler product ever again. I want CHRYSLER not GM. STAY SEPERATE!

2008 Oct 18 10:40 AM

[AmesTiedeman:]

The collapse of GM is worse than I had envisioned. You go to the dealerships and the cars are good looking with good interiors. They just can't get Americans to buy them.

2008 Oct 18 10:50 AM