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Bolstered By ‘Too-Big-to-Fail’ Theory,
GM/Chrysler-Merger Plan Is To Make
Two Losers Into A Winner

Jim Prevor’s Perishable Pundit, October 16, 2008

Wonder why General Motors and Chrysler may merge? On the surface it really makes little sense — and perhaps the GM board will still pull back. After all, it would be an enormously distracting and difficult task to integrate the organizations at precisely a moment in time when the executives need to be focused.

Both companies are hemorrhaging money, and their products are not particularly complimentary. The combination will not provide much in the way of pricing power, and eliminating overcapacity will be difficult as a result of union contracts.

So what could be the point? How can combining these two losers make a winner? How about this as a theory: GM wants to bulk up. GM has a 24% share of the US auto market, Chrysler 11%. Combine them and you have over a third of the market. The combined company will employ almost 200,000 people in North America, plus many more at parts suppliers. Its 11 brands will have over 10,000 dealers.

What is the lesson of the last few weeks? Be “too big to fail”!!! The word on the street is that GM President Frederick Henderson has been pushing the deal. Perhaps he is thinking he can become so big so that if GM threatens bankruptcy the government will feel it has to lend it money until the business cycle turns.

The theory is made more credible by the fact that GM first sought to merge with Ford — which would have made it bigger still. Ford should have done the deal; it would have been good for Ford shareholders as they run a real chance of losing everything as Ford may run out of money before an upturn comes. It is notable that its 56-year-old CFO unexpectedly announced he will retire.

One wonders if he pushed the deal? After all, though it may have been good for Ford’s shareholders it would have been a bitter pill for the Ford family to swallow. The Ford family controls the company through a special class of stock that gives it 40% of the votes, although the descendents of Henry Ford have an economic interest that is around a sixteenth of that. In a merger with GM, they would just get regular stock and thus lose their special place of influence in American industry.

Of course, the desperation of this moment is an outgrowth of the leveraging up of American business that has taken place over the past few years. One would lament more the possible passing of a great enterprise such as Ford except just a few years ago they drained a lot of money from the company by paying a $10 billion dividend — the largest dividend ever paid by an American company.

Maybe this is why so many Americans are angry at all these bailouts.

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