Monday, June 22, 2009
Detroit Free Press
DETROIT — Last year, when Chrysler LLC approached General Motors Corp. about a possible merger, many auto industry watchers scratched their heads and wondered: Why?
The idea of a GM-Chrysler union kept coming up, even though many saw little efficiency to be gained — at least in the short term.
Testimony and filings in the GM and Chrysler bankruptcy cases show GM’s motivation: money.
William Repko, a Wall Street financial adviser for GM, told the U.S. Bankruptcy Court in New York that when GM was struggling to get the lending it needed last year, it saw a Chrysler deal as a way to get banks to pony up more cash.
Several experts thought a GM-Chrysler deal made sense long-term. The court records show the companies began high-level talks in 2007.
Robert Manzo, a Chrysler financial consultant from Capstone Advisory Group, testified that his studies showed the value of a Chrysler alliance with GM was “higher than ... a deal with Fiat.”
With Chrysler now linked up with Fiat and GM slated to be remade by the government, the idea of a GM-Chrysler merger is in the past — at least for now.
But testimony and court records in the bankruptcy cases of both Chrysler and GM give a glimpse into the behind-the-scenes efforts to merge the Detroit automakers — and what was driving them.
Talks between the two automakers occurred in the spring of 2007, became more serious in 2008 and were shelved in November when it became clear to GM leaders that they needed to focus on saving their own company from collapse.
But as recently as April, Chrysler representatives were again kicking the idea around, testimony during the Chrysler bankruptcy hearings revealed.
Chrysler filed for Chapter 11 bankruptcy protection April 30; GM filed June 1.
Fritz Henderson, GM president and chief executive, described in records filed with the U.S. Bankruptcy Court in New York how his company entered into “high-level discussions” in the spring of 2007 with then-DaimlerChrysler to acquire Chrysler.
Ultimately, GM concluded a merger would “only exacerbate GM’s exposure to a dwindling U.S. automotive market with mounting costs and supplier concerns.”
Private equity firm Cerberus Capital Management emerged as Chrysler’s new owner.
But that wasn’t the end of the GM-Chrysler idea.
By June 2008, GM began privately working with finance experts at Evercore Group LLC, a global corporate advisory firm, about raising money through the capital markets to offset cash problems that were beginning to develop from two bad business quarters in 2008, GM court records say.
Publicly, GM also stepped up cost-cutting efforts.
Then, that summer, Chrysler approached GM again.
As speculation swirled over the possible deal, many questioned what immediate efficiencies could be realized by combining the sprawling global operations of GM with those of Chrysler, which were mostly limited to North America.
“GM still hasn’t achieved efficiencies within GM, let alone bringing Chrysler into the mix,” Erich Merkle, an industry analyst, recalls thinking at the time.
He noted that a new GM-Chrysler would have thousands more car dealerships than it needed nationwide.
Many also speculated that a GM-Chrysler union would result in dramatic job cuts as GM and Chrysler combined engineering and other back-room operations, reducing the need for thousands of white-collar ranks. Such a move was already beginning to take place, as Cerberus began laying the groundwork to combine the financial operations Chrysler Financial and GMAC, of which it was majority owner.
Still, a GM-Chrysler pairing had potential advantages.
A key person involved in GM’s efforts at Evercore was Repko, who spent more than 35 years working with troubled companies. He is the former chairman and head of J.P. Morgan Chase & Co.’s restructuring group.
In an affidavit filed with the court, Repko said GM was struggling to get the lending it needed, but the automaker felt that a deal with Chrysler in 2008 could be a way to convince banks to lend more money. GM had $15.8 billion in cash on hand at the end of September, while Chrysler had $11 billion, but the market was beginning to fail rapidly, leading automakers to burn through billions and anticipate they would need more.
Restructuring expert Van Conway of Conway McKenzie Inc. said it’s a strategy that could have worked, had the credit markets not collapsed in the fall of 2008.
“Once it crashed, there was no more bank money,” Conway said. “On paper, before the crash, it made sense.”