The Motor City spent the weekend considering the once-unthinkable prospect that its traditional Big Three automakers might shrink to the Big Two.þþThe merger talks between General Motors and Chrysler, first revealed by The New York Times on Friday, are yet another gut-punch to a city reeling from a mayoral scandal, soaring foreclosure and unemployment rates and huge losses in its hometown auto industry, The New York Times’s Bill Vlasic and Nick Bunkley reported.þþ“Detroit was a symbol of the great American industrial machine, and those days are long gone,” Kevin Boyle, a historian who has written extensively about his native city, told The Times. “It just weighs you down living in a place that seems to get hit again and again and again.”þþMany industry experts say that little is to be gained by merging G.M., which has lost more than $18 billion this year, and Chrysler, whose sales have fallen farther than any other automaker since it was acquired last year by the private equity firm Cerberus Capital Management.þþG.M.’s revenues and profits have been decimated by a sharp decline in sales of its trucks and big sport utility vehicles. Consumers are demanding smaller, more fuel-efficient vehicles, but Chrysler’s most popular products are Ram pickups, minivans and Jeep S.U.V.’s.þþMoreover, industry analysts say G.M. should focus on shrinking to a size that is more in sync with the market by reducing its overlapping lineup of brands, bloated dealer network, and shifting its products to fit better with the times.þþ“On the surface, it just doesn’t make any sense,”Erich Merkle, an auto industry analyst with the accounting firm Crowe Horwath in Grand Rapids, Mich., told The Times. “General Motors needs fewer brands, not more. They need fewer dealerships, not more. And the product lines don’t complement each other.”þþDespite all the obvious criticisms of the merger, the troubled companies are running out of options, and the status quo may not be among them.þþG.M. and Chrysler, along with the Ford Motor Company, have been battered by a weak economy, rising gas prices, a sharp shift by consumers away from their most profitable products, and a credit crisis that has emptied dealer showrooms.þþWith all three automakers burning through billions of dollars in cash, analysts are increasingly skeptical they can avoid bankruptcy before the American auto market recovers.þþ“Detroit right now is the proverbial falling knife you are trying to grab,” John Casesa, a principal in consulting firm Casesa Shapiro Group in New York, told The Times. “It has passed the threshold of a crisis.”þþFor G.M., a merger, for all the pitfalls, offers a way to increase its sales, add cash to its coffers, and save money by sharing operations and costs with a partner.þþG.M. first approach Ford in July about a merger, but the overtures were rejected last month, according to The Times, which cited people with knowledge of the talks.þþThen, G.M. turned its focus to Chrysler, the smallest of the three and bought by Cerberus last year from the German automaker Daimler AG.þþTalks between G.M. and Cerberus began about a month ago, but are still in the preliminary stages, The Times said, citing people close to the discussions.þþThe principal driver of G.M.’s interest in pursuing a merger is its president, Frederick A. Henderson, according to The Times. Mr. Henderson is the automaker’s former chief financial officer and onetime head of its operations in Europe, Asia and South America.þþMr. Henderson has told other G.M. officials the company needs a broader revenue base and new sources of cash to survive.þþDespite its recent woes, Chrysler still has an 11 percent share of the United States market that, added to G.M.’s current 22.4 percent share, would put it far in front of Toyota, with which it has been battling for leadership in terms of market share.þþBecause it is privately owned, Chrysler does not report financial results. In August, however, Cerberus said that the automaker had $11 billion in cash.þþThat cash hoard could be a big lure for G.M., which had $21 billion in cash on hand at the end of the second quarter, but is burning through an estimated $1 billion of it each month.þþ“The only way the deal makes sense is if there’s some cash involved, because that’s what G.M. needs,” Mr. Merkle told The Times.þþPeople close to the G.M.-Chrysler talks have handicapped the chances of a deal at 50-50, The Times said. Yet there appear to be pressing reasons for Cerberus to make a deal.þþCerberus’s chairman, Stephen A. Feinberg, has come under intense pressure from Wall Street bankers to jettison Chrysler, according to The Times.þþA consortium of banks, led by JPMorgan Chase, was forced last year to lend Chrysler $10 billion because the debt could not be sold to credit-wary investors.þþIn addition, Chrysler has not been able to slash costs fast enough to balance out its 25 percent decline in sales in the United States this year. The automaker also needs money to reinvigorate its truck-heavy product lineup.þþCerberus is also talking to other automakers, notably the Nissan Motor Company of Japan, about possible deals involving Chrysler, according to The Times.þþAside from core issues like price and other financial terms, a G.M.-Chrysler deal also hinges on the amount of cost savings a merger could yield.þþG.M. has a task force studying possible synergies between the two automakers, according to one person with knowledge of the team’s existence.þþThe biggest savings would likely come where they usually do in a merger — the elimination of jobs. And many of those cuts would come in Detroit and the rest of southeastern Michigan, where both G.M. and Chrysler have already slashed tens of thousands of workers from their payrolls.þþMore job losses would be another bitter blow in Motown. Since news of the exploratory discussions surfaced, the talk of Detroit has centered on how tough a merger would be on an already-beleaguered economy.þþ“Even since last year, nobody would have imagined how bad things would be now,” Mr. Boyle told The Times. “It’s just mind boggling.”þþStill, many Detroiters believe it would be better for G.M. to swallow Chrysler before an outsider.þþ“Should this happen, look for a lot of bloodshed,” wrote one person who posted a comment on a local Web site called DetroitYes.com. “However, it is better than another alternative — a Chinese company buys up Chrysler.”þþIt is just another measure of the impact of the old Big Three on a city that once symbolized the manufacturing muscle for the nation.þþ“Ten years ago, Detroit was under intense pressure, but it always had access to money to borrow in the market,” Mr. Casesa told The Times. “Well, that’s just not true anymore. In this case, being poor has taken Detroit’s swagger away.”þþ
Source: NY Times
