An Auto Merger Car Wreck

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

Even if you didn't agree with the bailout of the Big Three automakers earlier this month -- excuse me, I mean, "below-market loans" -- you could at least appreciate the rationale behind the move. Detroit was falling behind Nissan (Nasdaq: NSANY  ) , Honda (NYSE: HMC  ) , and the rest of the world in car sales, and it had become so strapped for cash it wouldn't be able to retool to make alternative energy cars to fuel its resurgence.

The government will thus dole out $25 billion to Ford (NYSE: F  ) , General Motors (NYSE: GM  ) , and Chrysler to get them up and running.

Hit the brakes!
Not so fast! It looks like GM and its supporters have other designs for that dough -- like handing a nice payday to the private equity firm Cerberus Capital, which has been desperately trying to unload Chrysler to anyone who might have a dime to spare.

It's understandable that General Motors cannot open its purse strings for Chrysler on its own. After all, it had already engaged in a game of chicken with Congress in an effort to get them to approve those loans in the first place. Back in September, GM drew down every last bit of its outstanding credit. It was a bit of brinkmanship, since analysts were already worried that GM might run out of a cash cushion sooner rather than later. If sales turned sour, there would be few places left for GM to raise money.

Well, car sales fell yet another 11% in the third quarter, jeopardizing GM's top spot as the world's biggest car seller against Toyota (NYSE: TM  ) this year, and placing the company in a bit of a financial bind. Enter those taxpayer-backed loans. In order for the GM-Chrysler deal to go through, the companies may need as much as $10 billion in capital to cover costs for the convoluted transaction. So GM is seeking to tap the loans that were originally targeted for fuel-efficiency ... to acquire Chrysler.

All in the family
The proposed merger is turning into an incestuous affair. The deal would also involve GMAC, the big consumer lending arm that finances GM car sales. But that entity is jointly owned by GM and, you guessed it, Cerberus. GMAC is now trying to become a bank holding company, which would entitle it to access a portion of the $700 billion bailout Congress passed for financial institutions. Morgan Stanley (NYSE: MS  ) and Goldman Sachs (NYSE: GS  ) recently undertook the same maneuver when they ushered in the death of Wall Street as we knew it.

To help GMAC qualify for the change in designation, GM must sell an additional one-fourth of the company to Cerberus. Cerberus currently has a 51% stake in GMAC, and GM wouldn't be allowed to own more than 24.9% of it.

There's no guarantee a GM-Chrysler merger will even remotely work. Don't buy the cost-saving synergies argument for a minute -- there's way too much geographic overlap between the two companies, they'd still have too many brands, there would still be too many dealers and too much overcapacity, and a GM/Chrysler combination probably still wouldn't be able to raise cash. In fact, the $11.7 billion in cash Chrysler has on the books is the real raison d'etre that GM's drooling over the deal in the first place.

A new national car company
Taxpayers may have been sold a bill of goods here. The $700 billion tab we were handed was supposed to stave off the exact sort of meltdown we've experienced the past few weeks. But we're stuck with a huge bill anyway. Then we were told that the billions for the carmakers would help them retool for the future, but now it seems those funds might be diverted to fuse two failing businesses, and allow a private equity firm to escape from a bad bet it made in automobiles.

This is just another car wreck waiting to happen. When the wheels come off, look for Washington to propose billions more to rescue these reckless companies.

Get behind the wheel of further Foolishness:

Nissan is a Motley Fool Global Gains pick. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (8)

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 31, 2008, at 10:17 AM, TMFMarlowe wrote:

    I think you've missed an important component of the story. This isn't GM running off on a mad spree, or in any way "recklessness" on their part. Cerberus is the one forcing the issue here -- strangling GMAC lines to GM's dealers (and thus choking off sales) to "encourage" GM to take Chrysler off their hands. GM, for its part, desperately needs credit or capital and its options dwindling. There's no "drooling" going on.

    They'd never admit this in public, but I bet GM's senior management sees a trip through bankruptcy court as the company's best bet for long-term survival, as it would allow them to dump a big chunk of their dealer body and shed the UAW albatross once and for all. To their credit, they're making a good show of trying everything they can before going that route.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 766561, ~/Articles/ArticleHandler.aspx, 10/28/2016 2:31:56 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 5 hours ago Sponsored by:
DOW 18,169.68 -29.65 -0.16%
S&P 500 2,133.04 -6.39 -0.30%
NASD 5,215.97 -34.29 -0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/27/2016 4:00 PM
GM $31.33 Down -0.25 -0.79%
General Motors CAPS Rating: ***
F $11.74 Down -0.14 -1.18%
Ford CAPS Rating: ****
GS $177.75 Up +0.68 +0.38%
Goldman Sachs CAPS Rating: ***
HMC $29.95 Up +0.01 +0.03%
Honda Motor CAPS Rating: ****
MS $33.82 Up +0.43 +1.29%
Morgan Stanley CAPS Rating: ****
NSANY.DL2 $14.49 Down +0.00 +0.00%
Nissan Motor Co.,… CAPS Rating: **
TM $114.85 Down -0.65 -0.56%
Toyota Motor CAPS Rating: ***