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GM and Chrysler Shouldn't Get Hitched

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With all-American car manufacturing giants General Motors (NYSE: GM  ) and Ford (NYSE: F  ) clinging to life, serious speculation has begun to circulate about whether either company will survive this economic mess. Could GM's recent acquisition target be the start of a new beginning of the ailing manufacturer?

Chrysler is currently owned primarily by private equity firm Cerberus Capital Management. Cereberus also owns a majority interest in GMAC, General Motors' former financing unit, which has been clobbered by its ill-fated move into mortgage banking.

Cerberus proposes swapping its 80.1% stake in Chrysler for GM's remaining 49% interest in GMAC. Cerberus has also reportedly been discussing a possible 19.9% acquisition of the remaining stake of Chrysler owned by Europe's Daimler (NYSE: DAI  ) . Sounds like a solid deal, huh?

Not so fast. Wiping away GMAC could be smart, but GM could complicate its attempt at a turnaround by picking up another brand to juggle, especially given the current environment. Specific numbers and values are somewhat elusive in light of Chrysler's private-company status, but we do know that Chrysler was in the red to the tune of $1.6 billion for all of 2007. In the same time frame, GM's GMAC stake cost it roughly $1.1 billion.

Recent sales trends have skidded backward, too. In September, Chrysler's U.S. sales were down 30% year over year, while GM's fell 12.3%, thanks to a special sales incentive. Overall, auto sales dropped 26% during the month. Given the industry's steady plunge, pricing the U.S. operations of Chrysler for transfer to GM could be daunting.

Automakers' sad state has industry members scrambling to improve their financial and operating circumstances. Ford has received board approval to unload at least a portion of its 33.4% stake in Mazda (OTC BB: MSDAF), and it recently handed over its Land Rover and Jaguar units to Tata Motors (NYSE: TTM  ) . And Toyota (NYSE: TM  ) has completely idled a pair of former pickup truck plants while it retools to manufacture other models, including the Prius hybrid.

That said, I think GM and Chrysler would fare far better apart than together. Clearly, neither has made any real strides toward rolling out meaningful numbers of energy-efficient vehicles, and each is likely facing a withering and prolonged slide in sales and income.

As such, combining the two in the current atrophying automobile climate would be like tethering together a pair of non-swimmers for a go at the English Channel. The likelihood that each wouldn't drag down the other seems remote.  

GM is down to a single star in Motley Fool CAPS. Would you grant the company a second one?

Further Foolishness shifts into gear:

Fool contributor David Lee Smith hasn't been driven to buy shares in any of the companies mentioned. He does welcome your questions or comments. Tata Motors is a Global Gains selection. The Fool's disclosure policy comes with standard side-impact airbags and a GPS navigation system.

Read/Post Comments (7) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 15, 2008, at 10:25 AM, weiwentg wrote:

    Whether you tie both non swimmers together or let them go at it individually, they're still going to drown in the English Channel.

  • Report this Comment On October 15, 2008, at 10:32 AM, lemoneater wrote:

    Somehow this reminds me of the marriage between Sears and K-mart.

  • Report this Comment On October 15, 2008, at 11:48 AM, DaddyKurtBucks wrote:

    I am going to disagree with the pundits on this. I think a GM/Chrysler marriage is a good idea and heres why:

    GM would get rid of their financial arm. This is what is dragging the company (and all banks) down at the moment.

    They would also NOT be gaining Chrysler's (troubled) financial department as Cerberus has already split the two. Cerberus would then hold the slips for all the bad loans given in th epast (of course, the good as well).

    If the deal is, as posted elsewhere, for GM to give its fincial arm for Chrysler Motors (with its 10 billion in cash) and 3 billion, it could afford to pay out the estimated 1 billion to UAW workers for a forced buyout and restructure/close plants to make Chrysler profitable AND... would eliminate a 61 billion a year competitor.

    Sounds like a win to me!

  • Report this Comment On October 15, 2008, at 1:44 PM, socialconscious wrote:

    I addressed the subject in my blog yesterday and attached an article.The ultimate goal here is to gain leverage with the UAW. Poor UAW they gave concessions in 2005.

  • Report this Comment On October 15, 2008, at 1:47 PM, socialconscious wrote:

    It sound like Cerebus would be a major shareholder and minimize there risk. Also they would have some A/R's. Good point DaddyK.

  • Report this Comment On October 15, 2008, at 1:47 PM, socialconscious wrote:

    All IMHO

  • Report this Comment On October 15, 2008, at 1:49 PM, socialconscious wrote:

    Also Ford should make Mazda cars and Ford trucks.Zoom Zoom

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