GM and Chrysler: Will the 'big three' become the 'bigger 1.5'?

The New York Times has reported that General Motors and the Chrysler Group are in talks to iron out a merger deal. According to the newspaper, GM has been engaged in discussion with Cerberus Capital Management, the private equity firm that owns 80 per cent of Chrysler -- and may yet pick up the remaining 19 per cent shareholding that Daimler AG is trying to offload.

The talks began a month ago, reports the newspaper, and two insiders have told journalists working for the paper that the chances of the merger going ahead are as strong as "50-50", but there's unlikely to be any further news for some weeks yet.

Since the talks began, the share price for General Motors has fallen as low as $5 -- a price last seen in the 1950s. The NY Times advises that the corporation's share price as recently as last year was as high as $43. It has been suggested by the writers at the NY Times that the merger is less likely to go ahead, now that GM's share price has dropped so drastically. Chrysler, by being owned privately, is not required to report its worth.

Parent company Cerberus is also reported to be locked in discussion with Nissan and Renault, with a view to offloading the car-maker to the French/Japanese 'alliance'.

Traditional American auto makers have been struggling to deliver profits to owners and shareholders since the most recent attack on the World Trade Centre in 2001, although the US sharemarket was showing signs of decay before that event anyway.

American manufacturers have been offering consumers zero-interest loans to move cars through their showrooms, but with the recent upswing in oil prices -- now on the way back down just as the credit squeeze starts to bite -- the market is even tougher.

On top of all that, GM, Ford and Chrysler are perceived to be marketing the wrong product at the wrong time to consumers and -- twisting the knife in the wound -- GM's dwindling share price has reduced its cash reserves to the point where the corporation may be forced to declare bankruptcy, says the newspaper.

At the end of the second quarter of this year, the NY Times reports, GM's cash reserves were around US $21 billion, but the outgoings were calculated to be US $1 billion a month. However, the paper also reports that as recently as Thursday of last week, GM announced that it would not be filing for bankruptcy and is working on a strategy to improve liquidity. That has not deterred credit rating firm Standard & Poor's from placing GM on a 'negative credit watch' on the same day.

If GM and Chrysler were to merge, the resulting conglomerate would be the largest-selling automotive business in the world. GM, the long-standing titleholder, has seen its sales slip to a degree whereby Toyota has outsold it during 2008 and the Japanese company is now well on the way to claiming top dog status.

For Chrysler, as the smallest of the American 'Big Three' (GM, Ford and Chrysler), the merger would be the latest in a series of mergers, acquisitions and divestments to keep the company afloat since the 1970s. There was the sale to Peugeot of Chrysler Europe (formerly comprising the Rootes Group from Britain and Simca from France) in 1977 and the sale of Chrysler Australia to Mitsubishi in 1979. Around the same time, Chrysler secured loans from the US government to remain viable.

Within 10 years, Chrysler had bounced back and acquired American Motors Corporation, which included the Jeep brand. The offroad specialist had been picked up by AMC as long ago as 1970. Jeep is the only erstwhile AMC marque to survive into the current era from the AMC acquisition.

In 1998, the Chrysler Corporation was itself effectively acquired by Daimler-Benz to form a new company, DaimlerChrysler AG. Within approximately seven years, the new entity had offloaded the financially troubled Mitsubishi Motors Corporation and then the powers that offered the Chrysler component of the corporation to Cerberus Capital Management last year.

Now, Cerberus too appears to have lost faith in the ability of Chrysler LLC -- as it is now known -- to turn a profit in the near future. On Saturday, Chrysler issued the following statement:

In 2004, GM had ceased operation of its Oldsmobile division -- the oldest surviving American marque and one that could trace its history back to 1897 -- to reduce the number of autonomous divisions under the company umbrella.

In recent years, GM has lost money bailing out of a contract to buy Fiat and has sold interests in Subaru, Suzuki and Isuzu. At the present -- and despite its current cashflow problems -- it is enjoying strong global sales of vehicles built by GM-Daewoo and is the leading car manufacturer in China (more here).

And just in case it appears that Ford is alone in facing the current adverse circumstances, that company is also beset by rumours it will sell off its profitable Mazda subsidiary -- with the latest relevant report published by a Japanese media outlet as recently as Saturday of last week.

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