Report: GM seeks $10 billion in federal aid to fund Chrysler merger

Nelson Ireson October 29th, 2008

By Nelson Ireson Author October 29th, 2008

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December 31st, 1969 As the potential merger between General Motors and Chrysler becomes clearer in detail, it is beginning to look less and less likely due to problems with the financing necessary for GM to complete the deal. Government aid could bridge the gap, and recently we saw reports that the Treasury was considering an aid package of at least $5 billion to facilitate the merger and help preserve thousands of jobs. However, latest reports indicate that GM has already asked the government for a $10 billion aid package to help it acquire Chrysler. Instead of a standard loan the federal government would receive preferred stock in the merged company, giving it a stake in the largest automotive manufacturing operation in the world should the merger take place. Sources within the Treasury have revealed information about the possible aid package, which would include both cash and government purchases of auto loans, reports Reuters. Although $5 billion is considered to be the minimum aid figure on the table, a figure closer to $10 billion may be necessary to get the combined GM-Chrysler operation steady on its feet. Executives at GM are confident they can acquire what it wants of Chrysler and improve its own position, but outsiders think such a result neglects the financial realities of the purchase. Chrysler is carrying about $9 billion in debt that would need to be either paid off or refinanced upon acquisition, further complicating matters for the merger. GM had nearly $21 billion in cash at the middle of the year, but was using about $1 billion per month at the time, and likely even more now as the market continues to slide. It must still generate another $4-5 billion in cash to pay off 30,000 to 40,000 union jobs that could be cut in a merger between the two companies if the deal does move forward. Government funding for the merger, if made available, could potentially salvage the deal and stave off some of the massive layoffs that would otherwise be necessary. Excess capacity for a combined and presumably streamlined operation would still necessitate some layoffs, but if the merged company wasn't forced to deal with raising billions in cash through cost-cutting, it might be able to hold on to more of the workers currently employed by both companies. GM does have the possibility of trading its remaining stake - 49% - in GMAC to Cerberus, owner of Chrysler, for all or part of its 81% share in the company, but that, too is fraught with debt and other difficulties. Nevertheless, the parties are charging forward, with a possible announcement within the next two weeks.

The influx of funds should provide some stability, at least for the short term

Enlarge Photo

As the potential merger between General Motors and Chrysler becomes clearer in detail, it is beginning to look less and less likely due to problems with the financing necessary for GM to complete the deal. Government aid could bridge the gap, and recently we saw reports that the Treasury was considering an aid package of at least $5 billion to facilitate the merger and help preserve thousands of jobs.

However, latest reports indicate that GM has already asked the government for a $10 billion aid package to help it acquire Chrysler. Instead of a standard loan the federal government would receive preferred stock in the merged company, giving it a stake in the largest automotive manufacturing operation in the world should the merger take place.

Sources within the Treasury have revealed information about the possible aid package, which would include both cash and government purchases of auto loans, reports Reuters. Although $5 billion is considered to be the minimum aid figure on the table, a figure closer to $10 billion may be necessary to get the combined GM-Chrysler operation steady on its feet.

Executives at GM are confident they can acquire what it wants of Chrysler and improve its own position, but outsiders think such a result neglects the financial realities of the purchase. Chrysler is carrying about $9 billion in debt that would need to be either paid off or refinanced upon acquisition, further complicating matters for the merger. GM had nearly $21 billion in cash at the middle of the year, but was using about $1 billion per month at the time, and likely even more now as the market continues to slide. It must still generate another $4-5 billion in cash to pay off 30,000 to 40,000 union jobs that could be cut in a merger between the two companies if the deal does move forward.

Government funding for the merger, if made available, could potentially salvage the deal and stave off some of the massive layoffs that would otherwise be necessary. Excess capacity for a combined and presumably streamlined operation would still necessitate some layoffs, but if the merged company wasn't forced to deal with raising billions in cash through cost-cutting, it might be able to hold on to more of the workers currently employed by both companies.

GM does have the possibility of trading its remaining stake - 49% - in GMAC to Cerberus, owner of Chrysler, for all or part of its 81% share in the company, but that, too is fraught with debt and other difficulties. Nevertheless, the parties are charging forward, with a possible announcement within the next two weeks.

Tags: Industry, General Motors

Posted in: Chrysler, News

by NoNameDenton #1, Posted: 10/20/2008

Well duh, they don't have the money to pull this off
by Jim #2, Posted: 10/21/2008

I can imagine the conversation where the plutocrats ask the government for money.

Plutocrat: Senator how about a few billion in loan guarantees.

Senator: Will you guarantee that you'll keep your production in the US, keep all the factories open and the employees on the payroll?

Plutocrat: Uh, uh...
by AXXel #3, Posted: 10/22/2008

Two drunks walking down the street
holding each other up...
until they hit the curb,
then they both fall down

The New York Times reported Friday, October 10th: “General Motors is in preliminary talks about a possible merger with Chrysler, a deal that could drastically remake the landscape of the auto industry by reducing the Big Three of Detroit automakers to the Big Two.”

I have long recommended that Ford and General Motors combine. Now we have GM and Chrysler nearing the altar. Actually, make that Cerberus Capital Management the firm that took an 80% stake in Chrysler from Daimler in 1998 when Chrysler had a 15% market share. Well, for Cerberus that wasn’t such a great investment was it with Chrysler’s market share now at 11%? Chrysler’s Jeeps and minivans...just what the new merged company would need in their product lineup. Not. And, of course, we have GM so loaded with SUV’s and large pickup trucks that I suspect a 50% off sale is just around the corner. $70/bbl oil, notwithstanding. With GM burning through about $1 billion/month of their current wallet of about $21 billion, GM is on negative watch and should be at the Fed’s door any second for a shot of transmission fluid before all the works get gummed up.

Given the fact that Cerberus had an appetite for Chrysler to begin with and that investment was preceded by the purchase of a controlling stake in GMAC in 2006, it would not be surprising to see this merger of failing companies combine. According to the Associated Press: “...Chrysler, a privately held company, doesn't have to open its books, but it lost at least $510 million in the first quarter and $1.6 billion last year. Its sales are down 25 percent so far this year, the worst drop of any major automaker.”

Apparently GM did talk to Ford earlier in the year, but Ford in a typical head in the sand reaction did not care for the idea in spite of the fact that, in my opinion, a merger between those two should have happened in the 60’s when they both discovered they didn’t know a thing about the auto business and couldn’t learn a thing from the Japanese.

It would be better for all three of these drunks to merge together because then you could have some immediate and measurable savings and synergies with the Fed acting as the host for a form of Automobiles Anonymous. And three drunks going down the street have a better chance of not falling on their faces when they hit that curb. Ford [F-$2.27] runs the better shop and has a clearer vision of the future with Alan Mulally determined to hoard money, simplify operations and slash the number of dealers. Combine the three, you get my vote. Combine GM [$6.40] and Chrysler as I think will happen and you have a new name perhaps to add to this list of these Dow Jones Industrial Average stocks:

American Cotton Oil
American Tobacco
Chicago Gas
Distilling and Cattle Feeding
Laclede Gas
North American
Tennessee Coal & Iron
U.S. Leather preferred
U.S. Rubber

AXXel Knutson
10.17.08
by HECTOR #4, Posted: 10/29/2008

I've been reading this headline since yesterday and the dominating feeling I have is DISGUST.

Disgust directed and the management of GM for having the unmitigated gall to ask for $10B of taxpayer money to fund another stupid move of theirs. Disgust at the government who is considering giving it to them. Disgust at the UAW who are also very much to blame for GM's downward spiral.

You have basically two companies that have ZERO idea of how to go forward. Chrysler, for all intents and purposes, is dead. GM is bleeding cash and reputation so fast they're not far from being forced to declare bankruptcy. So it occurs to the geniuses running the show that the best way forward is to merge these two decrepid institutions.

No, let's not build cars that people want. Let's ask those poeple to shell out $10B of their money to give it to people who burned through theirs.

Next time you see one of those Bob Lutz-approved crapmobiles out there remember that he wants your money... for free...
by dcars #5, Posted: 10/29/2008

So this management team, that has brought GM to near distinction, thinks it can manage an even bigger company. To make things even more crazy they want the government (us) to pay for it. It shouldn't go forward unless they get new people to run the company, that have a workable plan. Is Lee Iacoca available?
by Jim #6, Posted: 10/29/2008

Two mortally wounded companies merge in a terrible marketplace for the industry makes one larger company that is just as likely to fail. This proposed merger only prolongs the agony and wastes more time and money.

A trip to bankruptcy court is what's needed. The court can restructure the existing union and dealer contracts, over ride state franchise laws, and deal with the outstanding pension obligations. It will also wipe out share holder value and only return a small amount of the outstanding debt. Quite likely there would be new management and boards.

Great article in this AMs Washington Post
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/28/AR2008102803264.html?hpid=topnews
by NoNameDenton #7, Posted: 10/29/2008

Amazingly enough Chevy and Caddy sales in the rest of the world are on the rise, so who needs Chrysler
by AXXel #8, Posted: 11/17/2008

GM...PULL THE PLUG, Reset, PLUG BACK IN

Without the THREE U.S. automakers combining into one there is no rationality to bailing out GM. GM’s cash burn is triple the street estimate and has lost all control over its sales, its product development and its future. The executives and the unions have the company hostage to government capital infusion. Bankruptcy is a viable answer that can push off creditors and force unions and management to make concessions that are impossible unless a loaded gun is at their head. There is too much capacity, too many models, too many plants, too many employees producing products that are more easily produced by others. The VW bug was the first indication that the Big Three did not have a clue to the needs and long-term preferences of the U.S. consumer. And today we have a glut of SUV’s that will ultimately have to be sold at a first-ever half-price sale. GM has already built them, they have already paid for them and no one wants them. You need cash, blow them out the door ½ price or less and they are out of inventory and cash hits the balance sheet.

But to infuse GM with cash to keep it afloat without bankruptcy is no answer because next in line will be Ford and Chrysler. These three should be forced to combine and re-form to use their talents and capacity to building something we all need and that is energy independence.

There is one industry that has a payback that cannot be overlooked as a place to re-train and invest and that is in renewable energy. Train those people, insist that the manufacturing capacity of GM be converted to energy and produce, once and for all, a source of energy that once in place CAN NEVER GO UP IN PRICE. In World War II Ford built a massive number of B-24’s in their new Willow Run plant in Ypsilanti. That change in production and product proved that it can be done and Ford did a spectacular job producing that airplane to the considerable consternation to the Nazi war machine. Fast forward to 2008 and our enemy is our own waste and inefficiency; energy independence is crucial to our national safety and we can actually budget part of our national defense budget to this end.

I am not against giving money to GM...but I am against giving them money to build products that have no measurable or important upside to our economy long-term. I am against giving money to GM with Ford looking like that doggie in the window. Force them into solar, wind, wave and nuclear. Support them in their endeavor to re-tool and you got my money. Absent that, you will not get me to suggest giving them, their workers or their bloated retirees belly-aching about their co-pay when millions have no health care a single dime.

The side benefits are obvious: our defense structure is enhanced because we no longer have to depend on a cartel of Bedouins in the Middle-East to determine for us how much oil we are going to use and our environment actually can become healthy in L.A. vs. choking to death sitting in traffic on the five. We put a pin in our energy costs once in for all and bankrupt our dear friends in the middle east forcing them to drive Chevy Cobalts and trade in their Bentleys.

Here is what we said about the Chrysler/GM merger talk=
“Two drunks walking down the street
holding each other up...
until they hit the curb,
then they both fall down”