Saturday, February 24, 2007

Will GM really buy Chrysler?

Saturday, February 17, 2007
Will GM really buy Chrysler?
Talk of sale heats up as DCX shops U.S. arm
Christine Tierney and Bill Vlasic / The Detroit News

Two days after DaimlerChrysler AG said it was considering all options for its Chrysler Group division, signs multiplied that the German company is actively trying to sell the troubled American carmaker.

Several published reports said DaimlerChrysler was in talks with General Motors Corp. about a possible sale of Chrysler. Industry sources said unidentified private-equity funds also have expressed interest in a Chrysler deal.

DaimlerChrysler and GM declined to comment Friday on the reports. Company insiders told The Detroit News that while some talks may be taking place, an outright sale of Chrysler to GM is not a likely scenario.

Clearly, though, the process of selling off Chrysler is heating up rapidly.

The News has learned that JP Morgan Chase & Co., DaimlerChrysler's investment banker, has tapped its London-based mergers-and-acquisitions specialist Lawrence Slaughter to spearhead efforts to sell Chrysler. JP Morgan officials were at Chrysler's Auburn Hills headquarters this week and the firm is expected to issue a prospectus to potential buyers fairly soon.

The possibility of a Chrysler sale has riveted financial markets since Wednesday, when DaimlerChrysler's supervisory board effectively put the Auburn Hills automaker on the auction block.

On Friday, DaimlerChrysler shares rose 4.4 percent to $73.33 in heavy trading on the New York Stock Exchange. The stock has gained 13.8 percent in three days and is at a seven-year high.

But the reaction to a possible GM deal was less enthusiastic. Shares in the No. 1 U.S. automaker slipped 10 cents to close at $36.34 Friday amid concerns that a GM-Chrysler combination would slow GM's own recovery effort.

Details remain sketchy

While reports have cited talks between the two automotive heavyweights, details were scarce.

Trade publication Automotive News reported Friday that DaimlerChrysler and GM were engaged in "high-level" talks. Dow Jones Newswires reported that the companies have "at least discussed the possibility of GM buying Chrysler."

The talks were first reported by Germany's Manager magazine, which said GM Chairman Rick Wagoner and DaimlerChrysler CEO Dieter Zetsche had discussed a Chrysler deal. It said Chrysler's huge health care liabilities were a key issue that would have to be resolved.

A DaimlerChrysler spokesman declined Friday to comment on the reports. Bob Lutz, GM's vice chairman, would not address what he called "rumors" of a deal.

"We won't even confirm or deny the rumors," Lutz told The News in an e-mail Friday.

While Chrysler and GM have been in talks to build a large SUV together, according to sources, a full-fledged combination of the companies would be fraught with challenges.

"It's an idea that comes from out of the blue, but it's not impossible," said David Cole, director of the Center for Automotive Research in Ann Arbor. "The biggest issue is the pension and health care liabilities."

Firms aren't well matched

Both companies also are struggling with overcapacity, shrinking market shares and high labor costs. Moreover, their overlapping product lines could cause federal anti-trust issues.

"The product redundancies are huge," said George Magliano of the research firm Global Insight. "They have very heavy dependence upon big trucks. They have similar deficiencies in the car lineup."

With GM's long-awaited turnaround just now gaining traction, analysts wonder how Wagoner could risk the major acquisition of a slumping domestic rival. "For GM -- which hasn't exactly shown great skill in managing its own business -- to go out and buy a struggling automaker doesn't get me all warm and fuzzy," said Craig Huston, an analyst with the Gimmer Credit bond research firm.

People close to GM said while Zetsche and Wagoner enjoy a good relationship, the impetus for any talks between the two was DaimlerChrysler's urge to cut Chrysler loose.

DCX drops a bomb

On Wednesday, as DaimlerChrysler was prepared to report its annual earnings, Zetsche dropped a bombshell when he said the company was considering "all options" for Chrysler.

The announcement was all the more surprising given that it came as Chrysler was unveiling a restructuring that will slash 13,000 jobs and cut North American vehicle capacity by 12 percent.

But the decision to push a Chrysler sale had been building in recent weeks. After Chrysler lost $1.5 billion in the third quarter last year, German investors stepped up pressure on Zetsche to undo the 1998 merger of Daimler-Benz AG and Chrysler Corp.

Still, as recently as October, DaimlerChrysler was officially saying that Chrysler was not for sale. Company sources say Zetsche and other top executives began considering a Chrysler sale or spinoff after a companywide strategic review in the fall.

It was about that time when GM and Chrysler launched informal talks about possibly building sport utility vehicles together. Sources familiar with the plan said it centered on building a large Chrysler SUV off GM's Chevrolet Tahoe platform.

The question is whether GM has the appetite for a wholesale acquisition of Chrysler, which has an estimated $18 billion in health care liabilities and won't be profitable until 2008 at the earliest.

One key labor leader at GM's Adam Opel AG subsidiary in Germany said a Chrysler acquisition is the last thing GM needs.

"These are rumors and I hope, by God, GM wouldn't do anything like this," said Klaus Franz, who serves as deputy chairman of Opel's supervisory board. "We are on the right way to come back on track with the right products."

Detroit News Staff Writers Josee Valcourt and Sharon Terlep contributed to this report. You can reach Christine Tierney at (313) 222-1463.

Why GM might buy

Adding Chrysler to its fold would ensure GM remains the No. 1 global automaker for the foreseeable future.

The Jeep brand has a strong image and could pair well with GM's Hummer division.

Chrysler would give GM a strong family of minivans.

Why GM might pass

Chrysler's legacy costs, excess manufacturing capacity, bloated dealer body and truck-heavy lineup would exacerbate similar GM issues.

The purchase would be a major distraction for GM's management.

Buying Chrysler would invite huge investment banking costs and anti-trust issues.

Many of their models overlap, reducing synergies.

GM needs its cash reserves to fund its turnaround.

© Copyright 2007 The Detroit News. All rights reserved.


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