AMERICAN car giants GM and Chrysler could merge in a desperation deal that would lead to tens of thousands of job losses and reshape the global auto industry.
News of the talks, which emerged yesterday, comes amid rising doubts over whether any of America's big three Detroit automakers — GM, Ford and Chrysler — will be able to escape bankruptcy as they wrestle with the worst car market since 1993, high petrol prices and bulging cost bases.
Late last night it emerged that GM also explored a similar deal with Ford.
Robert Shulz, an auto analyst at ratings agency Standard & Poor's, gave warning on Friday that "macro factors could overwhelm them at some point". The rampant speculation led GM, which is losing about $1 billion (£588m) a month and is in the midst of a sweeping $15 billion cost- cutting drive, to deny it was pondering bankruptcy.
"Bankruptcy is not an option GM is considering. It's not in the interests of our employees, stockholders, suppliers or customers," a spokeswoman said.
The bonds of GM and Ford trade at between 30 cents and 50 cents on the dollar, a damning indication of the market's confidence in the companies. Chrysler's bank debt is hovering at around 30 cents on the dollar.
The negotiations are thought to have been initiated a month ago by Cerberus, the private-equity firm that owns Chrysler. The state of play after last week's unprecedented market turmoil is unclear.
Cerberus is in the more desperate situation of the two, according to analysts. Last year it bought an 80.1% stake in Chrysler for $7.4 billion. The year before it shelled out $14 billion for a 51% stake in GMAC, the financing arm of GM. Under the deal terms discussed, Cerberus proposed exchanging Chrysler's automotive operations for the remaining 49% of GMAC. If talks fail Cerberus is expected to pursue talks with Nissan or Renault.
A union of the two auto giants would create a behemoth employing more than 366,000 with over 100 plants and in excess of 10,000 dealerships in North America.
With both companies desperately trying to staunch losses, though, analysts say the deal would be a case of two plus two equals three.
GM is understood to have made initial projections for at least $10 billion in cost savings by closing overlapping plants, dealerships and cutting blue-collar jobs. Experts say a merger could cut the combined workforce by a quarter in America.
Since Cerberus struck the deals for GMAC and Chrysler, the fortunes of both have soured tremendously. GMAC has been hit hard by exposure to the sub-prime crisis through its mortgage arm Rescap.
Sales at Chrysler, meanwhile, have plummeted as customers spurned its big, gas-guzzling cars. Its US sales dropped by a third in September to 107,349 cars. Both GM and Chrysler will tap a $25 billion US government loan programme to help move to producing smaller, more efficient models.
Stephen Feinberg, head of Cerberus, has faith that GMAC will recover and is keen to raise his bet on the group. In a recent letter to investors he extolled the "historic opportunity" represented by mortgage securities and loans that are trading at "ridiculously low historically distressed levels".
Analysts said that the likelihood of a GM-Chrysler marriage was small. Car sales in America have fallen by 13% so far this year and both companies are heavily reliant on large models that have now fallen out of fashion with penny-pinching US consumers.
GM admitted in a statement that it was facing "unprecedented challenges related to uncertainty in the financial markets globally and weakening economic fundamentals in many key markets".
The company is further along in its plans to introduce more fuel-
efficient models and it is unclear whether the benefits it would get through increased scale would be outweighed by Chrysler's less-advanced restructuring plans.
Analysts warn that bringing the struggling groups together could make the unified entity sink faster.
A tie-up between GM and Chrysler is likely to have little effect in the UK and Europe. While GM has strong presences here — through Vauxhall — and in Germany, Chrysler's presence is negligible.
