Can Chrysler Survive without GM?

With the U.S. government refusing to put taxpayer capital behind the General Motors (GM)/Chrysler merger (see GM, Chrysler on Hold as Aid Hopes Fade), the question now turns to whether, and how long, Chrysler can survive on its own.

As reported by CNBC:

A deal to merge General Motors and Chrysler has hit an impasse after the Bush administration ruled out funding for it, putting any merger on hold until after the U.S. presidential election, three people with direct knowledge of the talks said on Thursday.

My Comment: Finally a logical response to what would have been a disastrous combination (see GM and Chrysler Near and Agreement, More GM and Chrysler Shenanigans, A Disastrous Deal, and GM + Chrysler = Ugh! for background on my views).

The article continued:

The development adds a new element of uncertainty for the embattled U.S. auto industry as Detroit’s political allies warn the sector faces a deepening financial crisis that threatens tens of thousands of jobs.

It also opens the door for Cerberus Capital Management, which owns Chrysler, to restart talks with the Nissan-Renault alliance, one of the sources said. The private equity firm had seen the alliance as a backstop to its talks about an outright acquisition of Chrysler by GM one of the sources said.

I do not see a combination of Nissan (NSANY)-Renault with Chrysler as viable either given Chrysler’s balance sheet. Who in their right mind wants to inherit Chrysler’s problems, especially in the current environment? To me, therefore, the only element of uncertainty that remains is how long Chrysler can survive before it must seek bankruptcy protection.

Look no further than Daimler (DCX) for evidence that Chrysler is on the precipice. Daimler recently wrote-down the value of its 19.9% stake in Chrysler to zero (see Daimler: Chrysler Stake Now Valued at Zero). After all, who has better information about the value of Chrysler than its former owner does? In addition, that former owner is now signaling that Chrysler equity is worthless.

In normal times, Chapter 11 would be an option for a firm in Chrysler’s position. It could continue to operate out of bankruptcy in the hopes of reorganizing the firm and restructuring its debt. However, given the current economic environment, DIP financing from private investors is likely unavailable. This would suggest that a speedy liquidation of Chrysler’s assets might not be too far off.

Disclosure: No positions.

Comments

[CLH:]

There is little chance that either company can remain in business as long as they are run by unions.

2008 Nov 02 01:07 PM

[Danny Newton:]

US production of motor vehicles peaked in 1999 and has shrunk about 1.7 percent per year for the next five years. The average age of a car is over 9 years now and the average age of a truck is about 7 years. The percentage of disposable income spent on transportation is very stable in all decades since 1960. The inflation adjusted value of new vehicles is tracked by the Bureau of Transportation Statistics and it is rising below the background inflation rate. I think this means that the weakest car company is going to die. If not now, then later when imports from China and India show up. Car companies are dumping their union problems by contracting out sub assemblies to non-union shops. The recent decision of VW to locate in Tennessee has exposed their plans to have only 2000 employees involved in makeing cars while over 11,400 employes will be getting their checks from nearby, mostly non-union contractors involved in making sub assemblies.

2008 Nov 02 05:42 PM

[Steven Hansen:]

chrysler is owned by a vulture who intended to carve up its prey and profit. their timing sucked and the prey is uneatable. vultures are needed in capitalism, but too many times recently they have destroyed healthy companies. chrysler is not too big to fail, is not viable, and should be deprived of life support.

2008 Nov 02 09:46 PM

[PeteK:]

All above comments are so true.
Imports from India & China supposed to arrive the US next year ?
If so, there will be lots of competitions and won't be good for US automakers. GM & Ford must move out of Michigan, otherwise,
no hope of survival. One Toyota dealer said, each Corolla sold, Toyota makes about $900. But GM will lose $600 for each small car the dealer sells. If that's true, no wonder GM is in such trouble.

2008 Nov 02 10:46 PM

[casey00001:]

Just wait until Wednesday after the election. All of the sudden the Gov't will back the merger. Its on hold so as to not hurt McCain.

2008 Nov 03 11:14 AM

[vaydee:]

" Just wait until Wednesday after the election. All of the sudden the Gov't will back the merger. Its on hold so as to not hurt McCain. "

Why would McCain not want the merger??

2008 Nov 03 07:31 PM

[casey00001:]

I think McCain would want the merger, my point is if the Republican Administration (Bush) helps out a private equity company, Cerberus Capital Managment (owners of Chrysler) it would be more fodder for the democrats. If loan guarantees are going to happen they will happen after the election.

2008 Nov 04 09:06 AM