Could GM Buy Chrysler? (GM)(DCX)

DaimlerChrysler has about $190 billion in revenue per year. At last quarter’s run rate, Chrysler was about $49 billion of that. But, last quarter Chrysler lost about $1.5 billion.

Some of Daimler’s shareholders would like to see Chysler sold. But, who would buy it.

With its position as the No.1 car maker in the world being eclipsed by Toyota and a reputation for cutting costs and getting concessions from the UAW, GM might be a buyer.

GM’s selling, general and administrative costs run about $25 billion a year. Chrysler’s are far less than that, but it would not be shocking to believe that there might be $2 to $3 billion a year that GM could take out of a combined entity. The real question is whether GM could close some Chrysler plants and eliminate factory workers in a consolidation. That is almost impossible to calculate, but there would probably be some savings.

The issue of how much debt would come with a Chrysler purchase would be a key to determining price. Daimler has a strong balance sheet, so it does not have to off-load a lot of debt to an acquirer.

So, to the question of price. Daimler has a market cap of $62 billion. Chyrsler is about a bit less than a third of revenue. GM’s market cap is $17 billion. Of course, Chrysler loses money, so it would not be worth the $20 billion that it might be if its margins were the same as the parent’s.

An investment banker could certainly make the argument that if GM trades at 10% of sales, Chyrsler should get a similar haircut. That would put its value at $5 billion. If it came without debt, perhaps closer to $10 billion.

A buy for GM? Actually, it may make sense.

Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.