Ford, GM Choose Different Paths to Restore Profitability

By Jennifer Yousfi

Shares of Ford Motor Co. (F) and General Motors Corp. (GM) posted gains Tuesday on speculation that consolidation in the U.S. domestic auto industry could be the struggling sector’s saving grace.

Over the last three trading sessions, Ford shares are up almost 18%, while GM shares are up over 37% on reports of possible merger talks and asset sales.

Both stocks have been hammered year-to-date, with Ford shares having plunged over 63% and GM shares down a staggering 74%. Declining sales have seen the automakers’ stocks touch lows not seen in decades.

Waning U.S. consumer spending and high oil prices have hit domestic automakers that have long relied on large trucks and sport-utility vehicles (SUVs) as the cornerstones of their product offerings. U.S. firms have been slower than their foreign counterparts, such as Toyota Motor Corp. (TM), in adopting the now popular fuel-efficient hybrids and smaller car models.

But both GM and Ford have said that bankruptcy is not an option they will consider. The automakers are aggressively pursuing two different paths to try to return to profitability. While GM seeks out a potential merger, Ford is selling off assets.

GM and Chrysler in Talks: WSJ

The Wall Street Journal reported over the weekend that GM has had talks with private-equity firm Cerberus Capital Management LP over a possible sale of the hedge fund firm’s 80.1% stake in Chrysler LLC. In addition to its marquee Chrysler brand, the automaker produces the Dodge and Jeep lines.

However, Chrysler is the weakest of Detroit’s “Big Three” and its Dodge Ram pick-ups and Jeep SUVs have been poor sellers in the current economic environment, which casts doubt on the validity of that report.

“Ford and even GM have been trying to shed unprofitable brands, so why would CEO Rick Wagoner go out and purchase brands that are struggling?” David Silver, an analyst at Wall Street Strategies Inc., told MarketWatch. “Chrysler is burning through cash at an alarming rate, and that coupled with GM’s cash burn would just push GM closer to disaster.”

Efraim Levy of Standard & Poor’s Equity Research agreed that a merger might not be the best route to take for beleaguered GM.

“Given the marketplace and restructuring challenges faced by the automakers, we think a merger would be counterproductive," Levy said, MarketWatch reported. “On the other hand, if GM would get access to Cerberus’s capital, we could see positives for the automaker.”

Labor unions have also expressed their discomfort with a possible deal between GM and Chrysler.

“We have not had any discussions formally with any of the companies,” United Auto Workers President Ron Gettelfinger said Tuesday on Detroit radio station WWJ, Bloomberg News reported. “I personally would not want to see anything that would result in a consolidation that would mean the elimination of additional jobs.”

But with U.S. auto sales at 15-year lows, job cuts at automakers are likely to occur with or without a potential merger, which could lead to eventual capitulation from the union.

“I think you could convince them,” David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan, said of the unions, Bloomberg reported. “Profitability over the long term is the only job security these guys have.” 

Another Ford Divestiture

GM approached Ford about a potential merger, as well, according to news reports, but the company founded by automobile pioneer Henry Ford is determined to go it alone.

After having already sold Land Rover and Jaguar to Indian carmaker Tata Motors Ltd. (TTM) for $2.3 billion, Ford is now shopping its one-third stake in Japan’s Mazda Motor Corp. (MZDAF.PK). Ford owns approximately 33.4% of Mazda and would like to sell a 20% share of the Japanese automaker.

And the buyer is likely to be one of Japan’s own, as Mazda’s main bank Sumitomo Mitsui plans to “do whatever they can to prevent this from happening” if Ford selects an unwelcome buyer, according to Credit Suisse Group AG analyst Koji Endo, BusinessWeek reported.

Two leading Japanese trading houses, Sumitomo Corp. and Itochu Corp., are the most interested bidders at the moment. It seems likely one of the two will come out on top as the winner for the Mazda stake.

Ford could certainly use the cash and the sale could also have benefits for Mazda, according to Takaki Nakanishi, JPMorgan Chase & Co. analyst. Nakanishi feels the sale will allow Mazda more freedom in decision-making, while maintaining its close ties to Ford.

“The synergy between the two companies is very significant, but we think they can produce this synergy without the management control inherent in its parent-subsidiary relationship,” Nakanishi said in a research note dated Tuesday, Reuters reported.

Original post

Comments

[Me/Wondering:]

Everyone talks about GM buying Chrysler from Cerberus and down sizing the work force. What if Cerberus (or some other private-equity party) bought GM with the thought of down sizing the leadership staff? This new vision might include building a few vehicles that customers would want to buy, make a profit and continue in business.

2008 Oct 15 11:35 AM

[dmoney:]

Buy, sell or hold? I got this crazy stock at $8.02 on rumor of a big profitable merger. Was I wrong. I heard they (aggessive traders) are shorting this stock to bankruptsy---is that true? Will the gov take care of this problem and give me my little change back?

2008 Oct 15 03:43 PM

[dmoney:]

AGAIN. BUY SELL OR HOLD THIS STOCK. GOT IT AT $8.02

2008 Oct 15 03:44 PM

[sumosama:]

no advice on buy, sell or hold, although I own a substantial amt of GM much higher than $8...

You need to understand that shorting can only drive the stock price down, not force a bankruptcy. Watch cash flow (EBITDA) for trends on cash burn rate.

2008 Oct 16 11:32 AM

[Paul Killinger:]

If you bought GM at 8 bucks, to borrow an old baseball saw, "You was robbed!"

2008 Oct 16 12:43 PM

[Paul Killinger:]

It is NOT A COINCIDENCE that auto companies that are successfully doing business in the U.S. are NON-UNION. Since that's not about to change, the Congress can "loan" them all the money they want, and the results will always be the same.

Just in case you doubt this, take a look at Boeing. In the middle of biggest financial meltdown of our lifetime, their unions are STRIKING over making some ridiculous wage in excess of $50 an hour for riveting airplanes together.

Autoworkers made these types of inane wages once. Now they're selling their houses on e-bay for $100. Is it any wonder?

2008 Oct 16 12:52 PM

[Paul Killinger:]

But whether or not the Detroit 3 can make money now is another question. If oil keeps falling toward $60, we'll see $2 gas at the pump again. For some period, possibly, that could temporarily return these companies to profitability, warts and all. If it does, and their stocks rebound, use this opportunity to get out of them permanently. (And consider yourself lucky!)

2008 Oct 16 01:03 PM

[MSmailbox:]

GM has many assets, other than financial. I assume that it holds the patents for many great innovations, which can be used on future vehicles, both conventional and electric, e.g. Hughes "Heads-up Display" is a winner! Now, integrate that technology with AutoLiv's infra-red system, which detects living creatures on the roadway, ahead of you, e.g. people, deer and other 'hot' spots. Other instrumentation can be migrated onto the "Heads-up Display," as well, so that you never have to take your eyes off the road. I would leave the entertainment controls on the steering wheel, where they allow the driver to adjust the sound system, without taking their hands off the wheel. Pontiac introduced this on the 6000 STE, back in the eighties and it's a winner, too. Advanced monitoring and control systems, like these, would complement ANY brand or type of vehicle. GM could even license their sub-components to other manufacturers, creating additional revenue streams, independent of their troublesome NA Operations. If GM seeks Chapter 11 protection, that would allow them to continue the development of such systems, as well as, allow them to form joint ventures with other North American auto maufacturers, such as Tesla. Tesla is very cool, but they're far from being able to produce high volume/lower cost vehicles. GM has the experience and the plant floor space, to turn Tesla into a mass market sensation. Beautiful, efficient electric cars, at a price which everyone can afford, built right here in America. With GM's liabilities (bondholders, shareholders and retirees) facing a total loss, I'm sure that they, as well as, the UAW would jump at the chance to receive a portion of what they are owed, over time, while at the same time, renewing the American auto industry. Ford and Chrysler could also be consolodated and integrated into this American Auto Cartel, which would sell cars domestically and internationally. This is but one potential direction, which would address the future, the past and the current situation. I don't know what they're (GM) planning at the moment, since I've been "out-of-the-loop" for 14 years, now, but something like this might be another contingency for them to consider, along with AutoLiv and Tesla.

2008 Oct 17 11:35 AM

[Pfloyd234:]

I think you would be crazy to own either GM or Ford at even these low prices. The economy is going to get much worse and the growth they were experiencing in foreign markets that helped make up a little of the horrible sales in North America is now experiencing dropping sales throughout the world. They are losing billions every quarter and I am surprised they are still in business today. They are draining through billions of their cash every month and it is not like sales will pick up soon. Sales will only continue to fall as the economy experiences one of the worst financial meltdowns since the Great Depression! Its funny that the companies say that they will not consider Bankruptcy. Unfortunately most companies don't have a choice. Bankruptcy is usually not a choice.....lol. When you run out of money what do you do? Bankruptcy comes no matter what the business says it will or won't do. The thought of GM merging with Chrysler is a joke. While these companies are shedding assets to a bring in badly needed cash why would they decide to acquire a company that is even worse then they are and the products they sell like Jeeps and Dodge Pickups can't even be sold with an employee discount for everyone! With the recent huge stock rally of GM and F shares I think you should take the given premium in the shares and get out while you still can. Disclosure: I own put options in GM. I have put my money where my mouth is!

2008 Oct 17 10:43 PM

[Pfloyd234:]

Another thing. Look at the recent merger that combined two struggling companies, Sirius and XM!! Look at the combined company's shares. Look at what happened when Alcatel-Lucent has become. When these companies talk about cost savings and synergies what really happens is just creating a bigger struggling company. Bad Company+Bad Company=Good Company? Not usually. Bad Company+Bad Company=A bigger Bad Company. Disclosure: Look above in other recent comment.

2008 Oct 17 10:53 PM

[MSmailbox:]

Looks like we need to find good companies, which are willing to merge with bad companies! Forcing this, would be socialism... Doing it now, would indicate that the "bad" companies, were not as bad as we think and that the "good" companies, are not as good as they think. I think?

2008 Oct 18 10:43 PM

[MSmailbox:]

Consolodation of manufacturing, is only one part of the equation... The outmoded "New Car Dealership," is the other end of the horse.One solution, would be for dealerships to become "Factory-Authorized Service Centers." There needs to be a distributed network of places to take your car for service. There does NOT need to be so many places to go and see your vehicle, or pick it up. Destination charges, showroom overhead, too many salespeople and the hassle of negotiating, make this process of getting your car at the lowest possible cost, and getting it quickly, obsolete. Regional show rooms with delivery points would reduce the time and cost of delievering your new car to you, from the factory... That's what the customer really wants, isn't it?

2008 Oct 22 01:18 PM