In the doomsday scenario raising anxiety around the Motor City, General Motors Corp. makes a deal for Chrysler LLC, keeps Jeep and the minivans, and vaporizes the rest of the company.
Tens of thousands of Chrysler's 66,409 employees lose their jobs as
cash-desperate GM swiftly cuts redundant operations and sheds
unprofitable models. Factories and dealerships are closed, and the
lights go out at Chrysler's gleaming corporate headquarters campus in
the northern suburb of Auburn Hills.
It's not something Andre Thibodeaux wants to think about. The
general manager of Lelli's, an upscale steakhouse and Italian
restaurant near Chrysler's 15-story tower, gets about half his lunch
business from the automaker and related businesses.
The eatery, with roots in downtown Detroit and family owned for
three generations, already has lost business as Chrysler and parts
suppliers have downsized and people eat out less due to economic
worries. The loss of Chrysler's corporate headquarters is almost
unthinkable.
"I can't imagine moving the building or changing or selling or
anything like that," said Thibodeaux. "Auburn Hills in general is built
all around that building."
Although it may be unimaginable, industry analysts say GM would have
no choice but to slash costs if it acquires struggling Chrysler from
its current owner, New York private equity firm Cerberus Capital
Management LP.
Both sides have been talking for months, but the pace recently has
increased. Cerberus wants out of the auto business, and as the credit markets
have dried up, GM, worried about running too low on cash before the
U.S. auto market rebounds, wants Chrysler's currency stockpile.
A person familiar with the negotiations said Friday that the talks
have advanced to the point where top executives of both companies have
looked at a deal and asked for refinements. The person spoke on
condition of anonymity because the talks are secret.
In August, Chrysler said it had accumulated $11.7 billion in cash
and marketable securities as of June 30. That figure remains around $11
billion, the person said, despite Chrysler's U.S. sales being down 25
percent through September, the largest decline of any major automaker.
Detroit-based GM is burning up more than $1 billion per month, with
several analysts predicting it will reach its minimum operating cash
level of $14 billion sometime next year. GM's sales are down 18
percent, and the company has lost $57.5 billion in the past 18 months,
although much of that comes from noncash tax accounting changes.
Chrysler's money pile would help solve GM's cash problem if credit remains unavailable.
Both automakers have had to deny bankruptcy rumors in recent weeks,
saying people who won't buy cars from a company that looks like it
could go out of business.
According to the person familiar with the negotiations, the deal
being discussed thus far calls for Cerberus to hand over Chrysler in
exchange for GM's 49 percent stake in GMAC
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Cerberus also would get an equity stake in GM, hoping to get a good
return should GM recover when U.S. auto sales bounce back from a
serious slump.
Other automakers, including the allied companies of Renault
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also are in discussions about Chrysler, the person said.
Simultaneously, Cerberus, which bought 80.1 percent of Chrysler from
Daimler AG in a $7.4 billion deal last year, is negotiating to acquire
Daimler's 19.9 percent stake.
GM and Cerberus are still a long way from a deal, according to the person, and GM's board reportedly is cool to the idea.
All that GM, Chrysler and Cerberus have said about the negotiations
is that automakers meet all the time. Chrysler Chief Executive Bob
Nardelli said Thursday the auto sales drop has created an environment
that favors consolidation.
It's the uncertainty of consolidation that worries many in Michigan,
which has lost more than 400,000 jobs since 2000. Its unemployment rate
in September was 8.7 percent, the highest in the nation, as GM,
Chrysler and Ford Motor Co.
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"Mergers usually represent job loss,"
Gov. Jennifer Granholm said Friday on the Public Broadcasting Service's
Nightly Business Report. "We are fearful that a merger would mean more
job loss, and that is the last thing we need."
Among the fearful are Chrysler workers and its roughly 3,600
dealers, who already are under pressure from the company to merge with
other dealers and scale back their ranks.
"If you end up going from the Detroit Three to the Detroit Two, you
don't need as many dealers representing those nameplates," said Dale
Early, owner of a Chrysler-Jeep dealer in the Houston suburb of
Kingwood, Texas. "With the market the way it is today, you don't
necessarily have a need for three major manufacturers," he said.
The upside of an acquisition, industry analysts say, is that it
would almost certainly shrink the U.S. auto industry to where it needs
to be so the survivors can thrive. Many analysts are predicting that
the U.S. auto market will shrink to sales of about 13 million vehicles
this year. That's a drop of about 3 million from 2007, and the decline
is more than Toyota Motor Corp.
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GM would almost immediately make cuts to eliminate duplication, save
costs and hoard cash, and that means something like the doomsday
scenario would occur, said Jeremy Anwyl, CEO of the Edmunds.com
automotive Web site.
"At the end of the day you're looking at two companies having a
much-reduced market share than the two independent companies," he said.
"The only way to make that work is some sort of scenario where there's
massive shutdowns and job losses."
But GM may see value in and keep other parts of Chrysler, which has several of the industry's most productive parts plants.
While the deal would likely cost jobs, David Cole, chairman of the Center for Automotive Research in Ann Arbor, said local economies and labor would still be better off than if one of the automakers were to fail.
"This would be good for the state because whatever happens in
combining is going to be a lot less severe than an outright disaster,"
he said.
Chrysler veterans, though, have seen the movie before with the 1998 takeover by Daimler and the subsequent sale to Cerberus.
"A lot of the things that would come out of something like this,
we've already had the anxiety related to it," Early said. "At some
point I guess you refuse to feel like the sky is falling because you've
already been through some of the dark days already."
AP Auto Writer Bree Fowler in New York and Associated Press Writer Corey Williams in Detroit contributed to this report.
