GM (GM) Deal To Takeover Chrysler Makes Progress, Creating Opportunity For Disaster

The merger talks between GM (GM) and Chrysler appear to be heating up. GM would like to have an agreement by the end of this month.

Putting the two companies together would be a disaster.

The UAW would almost certainly fight the deal to the death to save jobs. This could mean a protracted strike would could cut production for months. It would not be unlike what Boeing’s (BA) machinists are doing to that company, effectively shutting it down.

Both Chrysler and GM have already cut staff to the bone. There may be some more people who could go in finance, administration, and product development. That represents a modest savings given the risk of integrating all of the operations and production facilities of the two companies. The severance costs could also be remarkably high.

According to The Wall Street Journal, "Two major players driving the deal are JP Morgan Chase & Co. and Cerberus Capital Management. Cerberus owns Chrysler, while JP Morgan is one of the largest holders of Chrysler bank debt and is a key lender for GM."

The merger may be good for the financial parties, but it could be a disaster for GM. The largest US car company is focused on increasing its sales in emerging markets and re-tooling its American plants to build more fuel-efficient vehicles. The government is supporting this production initiative with $25 billion in loan guarantees for the Big Three.

What GM cannot afford is having its management spend the majority of its time integrating operations from a much weaker car company. Chrysler’s sales have routinely been down more than Ford’s (F) and GM’s. Chrysler has a model line which has been dominated by SUVs, minivans, and small trucks. In many car buyer satisfaction surveys Chrysler is viewed as having the worst quality products made in Detroit. In the last American Customer Satisfaction Index conducted by the University of Michigan, Chrysler models turned in remarkably awful scores.

GM would be taking on a company which has a poor reputation with consumers.

The combined firm would also face the problem of whether it would retain all of its brands and all of its dealers. Killing brands may save some money, but it could also cause customers to defect to products from other car companies.

Chrysler is likely to fail at some point in the next year. As a private company in a desperate industry operating in a credit crisis it has no access to capital. GM would be better off buying its assets out of Chapter 11.

Douglas A. McIntyre