Effects of GM-Chrysler Merger

If General Motors Corp. soaks up cross-town rival Chrysler LLC, the merger will change the automotive landscape.

GM reportedly is pushing for conclusion of an acquisition agreement, although it continues to decline comment regarding the potential combination, which according to Ward’s data would create, at least initially, an auto maker controlling 40.9% of North American vehicle production.

Financing the deal, however, would seem the greatest hurdle. GM is cash-strapped, and with the credit crunch still throttling lending between financial institutions despite the massive government bailout, highly leveraged private-equity firms such as Chrysler parent Cerberus Capital Management LP are finding it tougher to do business.

“We face a big absence of debt at the moment, so private equity will have to be imaginative and flexible in deals,” says David Brophy, director of the Center for Venture Capital and Private Equity at the University of Michigan and a member of the board of GMAC LLC, GM’s captive finance company, owned 51.0% by Cerberus.

“One thing you can say is that in all of this turmoil we’re going through, private equity will be the leader out of the mess,” he adds.

Signs pointing to an impending deal include reports Cerberus is moving closer toward obtaining the remaining 19.9% of Chrysler it does not presently own. Full ownership would make it easier for the private-equity group to dump Chrysler, just 17 months after gaining control of the 83-year-old auto maker from Daimler AG.

One chip in a GM-Cerberus deal for Chrysler would be GMAC. Reports suggested Cerberus was interested in swapping Chrysler for GM’s remaining stake in GMAC, and it appears the two sides are playing out their negotiating hands.

Cerberus has placed a floor on consumer credit scores for GMAC loans, a move that pinches financing for GM dealers. GMAC cites a “lack of stability in the global capital and credit markets” for why it’s limiting loans to applicants with credit scores of 700 or above.

GM responded by pointing out to consumers there are other vehicle-financing options and reportedly incentivizing dealers to book sales through other lenders.

GM also appears ready to jettison its Hummer division, possibly paving the way for an acquisition of Chrysler’s Jeep operations. Unlike Hummer, which became a lightning rod for environmentalists with its gas-guzzling H2 flagship model, Jeep is viewed by many as a more environmentally friendly brand.

“Jeep is the most valuable asset,” says Gerald Meyers, a U of M business professor and former chairman of American Motors Corp. Chrysler bought AMC for its Jeep brand in 1987, phasing out all other operations.

GM also moved to speed closure of some of its plants, adding more fuel to the takeover talk.

The capacity adjustments could be seen as an effort by the auto maker to quickly rationalize production before bulking up on Chrysler’s manufacturing operations. Both auto makers already have far more capacity than needed in the current market climate, with Chrysler sitting on a bloated 84-day supply of vehicles at the end of September.

Although a GM-Chrysler combination would boast 8.1 million units of production capacity, it’s unlikely such a manufacturing mammoth would last long.

Presuming GM long-term retained only Chrysler’s Jeep operations and some minivan capacity and possibly pulled its rear-drive car platform into the fold, a combined GM-Chrysler ultimately would remove an additional 1.13 million to 1.39 million units in car and light-truck capacity from North America.

That would take industry capacity closer to 18.2 million vehicles, still well above actual production levels, which are expected to fall below 14 million units this year.

Then there are the expected cuts in dealership ranks. GM and Chrysler independently have been trying to reduce their dealership numbers. A merger of the two auto makers would undoubtedly accelerate those efforts – and perhaps lead to deeper cuts.