DETROIT (AP) -- The chairwoman of the National Automobile Dealers Association says the credit crunch and economic problems are likely to cause 700 auto dealers to go under this year.

Speaking to the Automotive Press Association in Detroit, Annette Sykora on Tuesday urged fast government action on putting a $700 billion financial industry rescue plan in place.

The Texas auto dealer says quick action will thaw frozen credit, restore consumer confidence and help the auto industry.

Oct 13, 2008 04:30 AM

Ton Krisher
Associated Press

DETROIT–For General Motors Corp. to acquire Chrysler LLC and all of its warts, GM would have to get desperately needed cash as part of the deal. Lots of it, according to industry analysts.

With both automakers struggling to survive amid slumping sales, a slowing global economy and an unprecedented credit crunch, it's unclear whether Chrysler's majority owner, Cerberus Capital Management LP, would be willing to pay up, or whether Washington might even get involved to save one or both struggling automakers.

"There's got to be more in it for GM than just Chrysler," said Erich Merkle, an auto industry analyst with Crowe Horwath LLP, an accounting and consulting firm. "If you put two auto companies together, both that are losing money, both that are losing market share, you've just got an auto company that's losing market share faster and losing more money.''

GM and Cerberus, which owns 80.1 per cent of Chrysler, have held preliminary talks about an acquisition or other combination of the two automakers, according to persons familiar with the discussions who did not want to be identified because the talks have not been made public.

A tie-up between the automotive giants would be historic for the industry and solidify GM's position as the global sales leader, which it has been in danger of losing to Toyota Motor Corp.

GM and Chrysler already have a joint venture with BMW AG making a hybrid gas-electric powertrain. While melding the companies could save money by combining management, engineering, manufacturing and administrative staffs, analysts say consolidation would bring more costs and the rewards probably wouldn't come for several years.

That might be too late for both automakers.

Auburn Hills-based Chrysler, a privately held company, doesn't have to open its books, but it lost at least $510 million (U.S.) in the first quarter and $1.6 billion last year. Its sales are down 25 per cent so far this year, the worst drop of any major automaker.

Detroit-based GM is burning up more than $1 billion in cash per month, with several analysts predicting it will reach its minimum operating cash level of $14 billion sometime next year. Sales are down 18 per cent, and the company has lost $57.5 billion in the past 18 months, largely because of tax accounting changes.

All of this comes as U.S. sales have slowed to their lowest point in 15 years, making bankruptcy possible for all of the cash-strapped Detroit Three if things don't turn around soon enough.

Not exactly the prime scenario for a GM-Chrysler combination, said analyst Kevin Tynan of New York-based Argus Research Corp.

"Even though you're getting the rationalization of folding the two businesses together, it doesn't make sense at this time," he said. "There's got to be some sort of outside motivation for them to do that sort of deal, especially in this market.''

That outside motive, analysts speculated, could be the federal government, which would inherit massive pension liabilities if either company went under.

In exchange for taking on Chrysler, analysts envisioned that GM could be given access to low-rate emergency borrowing from the Federal Reserve's discount window, used in normal times by banks.

GM, though, said it is not going to the Fed at present.

"We're not actively pursuing anything at this time," said Greg Martin, GM's Washington spokesperson.

The Wall Street Journal reported late Friday that Cerberus might trade Chrysler for GM's 49 per cent stake in GMAC Financial Services. Cerberus bought 51 per cent of GM's former financial arm for $14 billion in 2006, but since then GMAC has suffered because of bad mortgage loans.

GMAC could look good to Cerberus now, Merkle said, because its insurance and auto businesses are profitable and the federal government may take on its bad mortgages through the $700 billion financial bailout plan approved earlier this month.

If a merger were to go through, GM could move quickly to cut costs and save billions, said Van Conway, a mergers and acquisitions expert and partner with Birmingham, Mich.-based Conway & MacKenzie. The company would have to calculate whether it has enough cash to stay alive and fund the deal, he said.

If the numbers work, a lean, merged automaker would be in a strong position to make money once the U.S. market recovers and people start buying vehicles again, Conway said.


Neither GM nor Chrysler would confirm that they've talked, but each said discussions between automakers are routine. There also were weekend reports that Chrysler was in talks with Nissan-Renault, and The New York Times reported that GM had approached Ford Motor Co. about a merger earlier in the year, but Ford wanted to stay independent.

The auto industry has been hit hard in recent weeks by the effects of the credit crisis, prompting GM and Ford to issue statements Friday to dispel the notion that they might be headed for bankruptcy.

GM and Ford shares were battered with the rest of the stock market this week, falling to lows not seen in decades. GM shares lost about half of their already-depressed value during the week, closing at $4.89 on Friday. Ford shares fell similarly, ending the week at $1.99.

Bill Vlasic, the man who was kind enough to drop the GM/Chrysler pseudo-bombshell on us late Friday night, posted a follow-up to his remarkably unremarkable story claiming that General Motors originally had talks with Ford about a possible merger before approaching the Pentastar people.

Again, the New York Times' scribe cites two unnamed sources about the merger discussions, reporting that GM approached Ford with the proposal, only to have FoMoCo execs shoot down the idea after several meetings. The talks included GM CEO Rick Wagoner, president Frederick Henderson, Ford's executive chairman Bill Ford Jr. and chief exec Alan Mulally.

According to the NYT's shy sources, the Blue Oval boys broke off talks in September when Ford and Mulally came to the conclusion that Ford would be better off reorganizing on its own rather than being tied to another automaker.

The Detroit News got in on the action yesterday, citing another anonymous source that said, "There were never in-depth, substantive discussions that went on. It was more an expression of interest [on GM's part], as in, 'Do you want to talk?'" Ford declined.

While all these reports are great at selling dead trees (and generating page-views), it deserves noting that high-level discussions between automakers are nothing new and hardly uncommon. Recent discussions – particularly those in the cited time-frame of three or four months, when federal loans to Detroit's Big Three were on everyone's lips – are surely newsworthy, let's not forget that parts sharing, from transmissions to hybrid drivetrains, have been happening routinely over the last few years. All this leads us to believe that business between Motown's finest will continue unchanged (for better and worse) and that unbelievable headlines are exactly that.

[Sources: NYT, Detroit News]