GM-Ford Merger?Anything's Possible

Will General Motors Corp. make an offer to merge with Ford Motor Co.?

Business Week magazine and several financial analysts report such a merger was proposed at a GM management meeting by a “senior GM executive,” reportedly GM's new president and former chief financial officer, Fritz Henderson.

“Anything is possible,” says veteran dealer Hoot McInerney, whose deep roots in the Detroit market have given him acquaintanceships with many present and past executives of GM, Ford and Chrysler LLC.

Fresh from a private session with retired industry titan, Lee Iacocca, in town for a Chrysler party feting him, McInerney tells Ward's that the former Chrysler CEO was not surprised by the talk of a GM-Ford match-up.

Iacocca, 83, pointed out to his Detroit hosts that the market change away from gas-guzzling cars and trucks toward more fuel-efficient vehicles “has brought about a sea change of major proportions.”

When Iacocca led Chrysler out of a near-bankruptcy situation in the early 1980s, there also emerged discussion of mergers among the Big Three domestic automakers, McInerney recalls.

But a federal loan guarantee of $1.2 billion helped forestall a bankruptcy filing, and Chrysler paid off the loan within three years.

Relentless cash-burn problems in North American operations, aggravated by slumping sales of fullsize trucks and SUVs, have given rise to talk of a GM-Ford alliance.

In Ford's case, the prospect of a once-unheard-of marriage has gained traction because of billionaire investor Kirk Kerkorian's accumulation of a 6.5% stake in Ford for $800 million and Cerberus Capital Management's 51% stake in GM finance subsidiary GMAC. The plunge in GM and Ford stock prices to near-record lows at the end of June added to the matrimony buzz in investor, supplier and dealer offices.

GM Chairman and CEO Rick Wagoner, who shot down a 2006 proposal from then GM shareholder Kerkorian for a mating between GM and Renault-Nissan, responded to the GM-Ford rumors by asserting that GM has enough cash to ride out this year and has ample resources left to raise cash, such as selling the Hummer brand.

But GM's market capitalization has tumbled to nearly $7 billion, compared to more than $20 billion last November. As for Ford, it has about $29 billion in cash, but Moody's Investor Service says it could burn $14 billion of that amount over a two-year period by 2010. GM is believed to be burning $1 billion of cash a month this year.

The Ford family's 40% ownership of company stock would be a primary consideration in the course of any movement toward a merger of the two automakers. Brand overlap would be another problem. But such a liaison would give the new company (General Motors-Ford or GM-Ford) nearly 40% of the U.S. market at current levels and, says McInerney, “certainly strengthen their competitive positions against Toyota and Honda.”