By Colin Bird on October 16, 2008
For the past week, rumors of a GM/Chrysler merger have turned from mere talk to an actual possibility. Last night, Reuters confirmed that talks between the two Detroit firms were still on. Earlier this morning, CNBC sources were told that GM and Chrysler would conclude talks by the end of October, either enacting a deal or abandoning the idea entirely.
While it’s being called a merger, most scenarios point to GM buying out Chrysler, just as Chrysler bought out American Motors in the 1980s. This scenario would probably mean the loss of models, and maybe even entire brands, including Chrysler and Dodge. And when we say GM – which isn't in the best financial situation, with about nine months of oprating cash on hand – is “buying out” Chrysler, there would actually need to be a complex swap of stock, cash and assets with Chrysler’s owner, Cerebus.
Here’s what could happen based on all the reported speculation:
GM: All its brands solider on, with the exception of Hummer, which is under strategic review to be sold or shuttered.
Chrysler: Would become defunct over time. Chrysler and Doge could be folded into GM’s lineup or, most likely, shuttered completely. Jeep, which has always been one of Chrysler’s most valued brands, would continue to exist. Chrysler’s minivans are the firm’s greatest value; a Chevy bowtie — or Saturn, Buick or Pontiac badge — could simply be slapped onto a new Town & Country in very short order.
As a consumer, this sort of tie-up should almost always be viewed as a net negative. Mergers are good for companies and stockholders because they eliminate competitors. The auto industry has too much capacity and too many companies looking for buyers, but that’s a good thing for you. It keeps prices low and gives you the greatest choice.
What GM is trying to do in one swoop is eliminate a direct competitor so that it can drastically reduce supply and survive until better times — all at the expense of Chrysler, of course. Chrysler sells 26 models; under the above scenario, 18-20 of those models could be eliminated. With fewer players, all car companies could theoretically raise prices or offer fewer, smaller discounts.
However, if the alternative to higher prices and fewer choices is a bankrupt Detroit Three, the merger is probably the best bet for the U.S. economy. However, that would be little consolation for the thousands of Chrysler employees who would be laid off in such a deal. The latest reports say that the entire process could be completed by Halloween. A scary day, indeed.