Not a Good Sign: Cerberus Reopens Talks to Merge Chrysler With GM

[RedEarth]

Not a Good Sign: Cerberus Reopens Talks to Merge Chrysler With GM


There had been rumors that Treasury would unveil a rescue plan for the Big Three on Wednesday. The day came and went with no announcement.

Tonight we learn, via the Wall Street Journal, that Cerberus has revived merger talks for Chrysler with GM. The possibility of a deal would seem to complicate vastly an attempt to craft a rescue package (if Paulson & Co. was close to a deal for each of the Detroit automakers, the spanner-in-the-works of a pending transaction would force the powers that be to rethink how what the offered for GM and Chrysler separately would change if they were combined. It introduces an element of delay for two companies that have said they need a cash infusion in very short order.

That in turn suggests either that the discussions with the Treasury are not going well (at least from the GM/Cerberus point of view) and/or they are going too slowly relative to the urgency of their financial needs, and they are being forced to consider desperate measures. (Note that the New York Times has a "parties are deep in discussions" article up, saying that the government hopes to announce a deal by Christmas and indicating that Treasury is doing extensive due diligence on the companies' books and plans to come up with something more comprehensive than giving a lifeline just big enough to tide them over to the Obama administration. No wonder the carmakers are nervous).

Another element that is distressing is that the media is increasingly taking up the theme that a Chapter 11 filing is the only way to restructure existing arrangements (too many focus on the UAW, when the bloated dealer networks are a bigger issue). But as The Deal pointed out in a lengthy discussion of what a Chapter 11 for GM would look like, a prepack is impossible given the number of involved parties. Worse, the process was likely to extend till late 2010. Consumer surveys have found that as many as 80% of prospective car buyers would be leery of purchasing a car from a manufacturer in Chapter 11. Short of Pinto-like exploding fuel tanks, a protracted process that is regularly in the papers is the worst sort of PR the carmakers could have.

Nevertheless, popular opinion seems to be moving to BK as the only way to get out of existing arrangements. The parallels to Lehman are scary. Outcomes are being driven by sentiment, not by analysis. Treasury and the Fed knew Lehman was on the ropes, yet made no serious effort to understand the possible impact of a Lehman failure. They should have been all over Lehman after its near-death experience when Bear went under, but instead sat on their hands.

With Lehman, the big unknown that should have been investigated was the true state of its balance sheet. With the Big Three, the wild card is how consumers would react. No matter how great theoretical advantages of Chapter 11 are, if a large proportion of customers abandon the company due to worries about its future, there is nothing to save. The Chapter 11 will morph into a liquidation as expected cashflows during the Chapter 11 process fall vastly short of anticipated levels. Assessing likely consumer reaction is far easier and less fraught than subjecting Lehman to serious examination would have been (there was a real risk that it could have fed concerns about the firm and accelerated its demise).

But as with Lehman, the public is developing bailout fatigue, and the carmaker's failings seem more obvious than those of the financial industry, and therefore less deserving of forbearance.

AIG's loans so far come to $1.4 million per employee, and many of whom are stationed overseas. But their requests for more cash and better terms got speedy approval, while the auto industry, on whom far more jobs depend, may be dealt a deadly blow due to the failure to due a basic investigation of likely consequences.

.................more

http://www.nakedcapitalism.com/2008/12/not-good-sign-cerberus-reopens-talks-to.html

[napi21]

1. Gee, it's always a great idea to merge TWO losing co's huh? n/a

[drm604]

2. The AP is saying that GM is saying that this isn't true.

http://biz.yahoo.com/ap/081218/gm_chrysler_talks.html

AP
GM says report on Chrysler merger talks is untrue
Thursday December 18, 9:51 am ET
GM says report that it and Chrysler have reopened talks for a possible merger is untrue

DETROIT (AP) -- General Motors says a report that it and Chrysler have restarted talks to combine the two ailing automakers is untrue.

The Wall Street Journal, citing people familiar with the discussions, said Thursday that talks about a combination have been rekindled after Cerberus Capital Management LP, the majority owner of Chrysler LLC, signaled it is willing to part with some of its stake in the automaker.

Spokesman Tony Cervone says GM's stance on the merger talks has not changed since it suspended them when it announced third-quarter earnings in November.