Merging GM (GM) And Ford (F)

Going back to 1962, GM (GM) sold half of all the cars bought in America. By 1981, it had only dropped to 45%. In 1999, the Big Three still had a 71% share of the US market.

Based on November numbers, GM, Ford (F), and Chrysler had less that half of the domestic market. Toyota (TM) now has 15%. The three largest Japanese companies are close to combined share of 25%.

Two years ago, ratings agencies were saying that there was a 20% chance that either GM or Ford would have to go Chapter 11. In March 2005, credit ratings analyst Sean Egan "If the name wasn’t Ford, it would be filing for bankruptcy by now".GM’s share price fell to $19 early in December 2005. Ford fell to just above $6 the following July.

Ford was back at $6.87 last week. That is despite a very favorable contract with the UAW and approximately $5 billion in cost cuts over the last 18 months. GM says it has cut annual costs by $9 billion, but its shares got as low as $24.50 last week.

In other words, neither company’s stock is doing much better than it was when things were at their worse.

The answer as to why the stocks are down so much is easy, Even with sharp cuts in costs, if the US car market only produces 15 million unit sales next year, Ford and GM will loss billions of dollars in North America Their efforts to get their companies into better financial shape will have been shattered.

GM and Ford would be better off together at this point, They would have less than 40% of the domestic market, so the argument that it would be a monopoly is thin, especially with companies like Toyota in the mix. GM’s quarterly revenue runs almost $50 billion, but its net income last quarter was only $891 million. Ford’s quarterly revenue is about $41 billion. It had a net loss of $380 million in the September period.

Putting the two companies together and eliminating competing brands, management, plants, and design costs would probably knock out $5 billion to $10 billion in annual costs, based on a look at both company’s SEC filings. The firms would have to go back to the UAW, but the union has at least become more realistic about the stark reality of the domestic car market.

GM and Ford may not be able to survive in their current incarnations if there is a "50 year storm" in the US car markets. But, they would make it together.

Douglas A. McIntyre