(From THE WALL STREET JOURNAL)
By Gina Chon and Neal E. Boudette
General Motors Corp. is flirting with the idea of acquiring DaimlerChrysler
AG's Chrysler Group, but it would face massive challenges if it were to take
over its longtime rival.
Both GM and Chrysler have excess manufacturing capacity in North America, more
U.S. dealers than they need and enormous and rising health-care bills for union
workers and retirees. For GM, a purchase of Chrysler "makes no sense to me,"
said Peter Nesvold, an auto-industry analyst at Bear Stearns Cos.
A potential GM-Chrysler alliance has drawn intense scrutiny since
DaimlerChrysler Chief Executive Dieter Zetsche last week said that "all options
are open" for its U.S. arm, and after subsequent reports of GM's interest.
Speculation over potential buyers has also included private-equity investors as
well as other auto makers interested in staking a claim to the massive U.S.
market.
But any Chrysler buyer also would inherit the troubles plaguing Detroit -- and
GM already has its share. David Cole, president of the Center for Automotive
Research in Ann Arbor, Mich., said a GM takeover of Chrysler "would be a
stretch." In a Feb. 20 report, Goldman Sachs Group Inc. called the idea
"illogical."
Nevertheless, people familiar with the matter said GM has had discussions
about buying Chrysler and hasn't ruled out the idea. The two companies also are
considering working together under a less intensive relationship in a few
specific areas, such as sport-utility vehicles and minivans, these people said.
GM has made progress in the past year on streamlining its global operations
and cutting costs, an effort that could be knocked off course if management has
to focus on integrating and righting an unprofitable operation such as
Chrysler, said Mr. Nesvold. "Right now, GM's objective is to make its business
less complex, not more complex," he said.
Analysts say GM could gain advantages from buying Chrysler. A purchase would
eliminate a direct competitor from GM's biggest market. Chrysler's Jeep brand
could be a nice complement to GM's Hummer. Chrysler is also strong in minivans,
a segment GM has left.
A deal might also give GM the additional leverage to negotiate health-care
cuts with the United Auto Workers union. Both GM and Chrysler are obligated to
set aside billions of dollars to pay for pensions and health-care coverage for
workers, retirees and their dependents. By taking over Chrysler and threatening
to close Chrysler plants, GM might be able to push the union to accept cuts
that would lower the health-care liabilities.
"That's the one big carrot I can see," Mr. Cole said.
A UAW spokesman declined to comment. But the union's president, Ron
Gettelfinger, told Detroit radio station WJR yesterday that he had "no opinion"
on a potential GM takeover of Chrysler. He discounted reports of a potential
deal, saying, "I've talked to a lot of people, a lot of people about this [and]
it's pure speculation right now." He added, "it may end up that it's not sold.
Who knows?"
Analysts say the cost and difficulty of putting GM and Chrysler together would
outweigh any savings on those costs, a legacy of past labor agreements.
GM has 31 auto-assembly plants in North America and is closing five, but
Chrysler would add 13 to the fold (Chrysler plans to close one in Newark,
Del.). GM has eight brands -- too many, according to many critics -- and
Chrysler would add three.
The GM and Chrysler product lines overlap in many areas, and both derive much
of their profit from pickup trucks. "For anyone who has a nice truck portfolio
and is looking to build car brands, Chrysler would not make sense," said Rich
Kwas, vice president of equity research at Wachovia Securities. Because of this
concentration, a GM-Chrysler combination would almost certainly face intense
regulatory scrutiny.
Eric Selle, a credit analyst at J.P. Morgan Chase & Co., told investors on a
conference call Tuesday that a deal would delay a realization of savings in
GM's global organization. He said the deal would make sense to GM only if the
price were right and the company could get a quick return on its investment.
In the past few months, Mr. Nesvold noted, GM has touted its growth in
overseas markets such as China and Russia. But buying Chrysler "would make them
even more concentrated in North America," he said.
Paring the combined dealer networks of Chrysler and GM would probably prove
highly expensive. GM has 7,000 U.S. dealers; Chrysler would give it 3,700 more.
At a recent conference sponsored by J.D. Power & Associates in Las Vegas, Troy
Clarke, president of GM North America, said GM is trimming the ranks of its
dealers as part of a strategy to consolidate Buick, Pontiac and GMC into a
single sales channel. Mr. Clarke indicated it is unlikely GM would try to slash
its dealer ranks rapidly through some sort of buyout.
"We know exactly how much that costs," Mr. Clarke said, alluding to GM's $2
billion shutdown of the Oldsmobile brand. "Where we need to put our money is
product."
Last week, DaimlerChrysler reported fourth-quarter earnings fell 40% because
of a 124 million euros ($162.9 million) loss by Chrysler. The company has hired
J.P. Morgan to explore options for Chrysler, including selling all or part of
the division.
Partners Renault SA and Nissan Motor Co. have said they aren't interested in
buying or partnering with Chrysler, as has South Korea's Hyundai Motor Co.
