Blockbuster Mega Merger Could Be In The Offing

As members of Congress and the Obama administration examine the recovery plans for General Motors and Chrysler, adding tens of billions of dollars more of federal money into the domestic auto industry becomes all the more probable. Neither company is likely to survive as is with draconian steps required to right the two listing ships.

A Collapse of the Domestic Auto Industry

While the scenarios outlined by General Motors and Chrysler outline their respective dreams, the federal government has to make sure that whatever steps it takes doesn’t turn out to be a nightmare. Clearly, the economy is too weak right now to sustain a collapse of the auto industry, a move which would likely hasten the downward spiral nationally and thereby globally.

If GM or Chrysler were to collapse then Ford would suddenly become more vulnerable as would other manufacturers who rely upon the inter-weaved auto industry supply chain.  Double digit unemployment would quickly become a reality and all other areas of American life would suffer.

Solving Problems or Offering Band Aids

Federal officials do, however, have a golden opportunity to resolve the auto industry’s problems once and for all. Instead of putting billion dollar band-aids on the industry - which would only delay the inevitable - a blockbuster merger may be the best outcome.

In my opinion the following scenario could be rolled out:

• The federal government guides both General Motors and Chrysler through their respective structured bankruptcies. These moves would allow each company to jettison excess brands, close down dealerships, lay off workers, shut down factories and renegotiate debt.

• A government appointed overseer (formerly known as the car czar, but likely to incorporate a team the president now has in place) would immediately consolidate General Motors and Chrysler operations. The new entity would oversee business going forward even as Pontiac, Saab, Hummer, GMC and Saturn are closed down joining Chrysler and Dodge. The new four-brand General Motors would consist of Cadillac, Buick, Chevrolet and Jeep.

• Although Fiat could be left hanging in the event that Chrysler is folded into GM, this could also prove to be a good opportunity for the American and Italian governments to discuss how the automakers can work together. Fiat might still be able to supply some models for the newly restructured GM while GM would open up its dealer network to sell Alfa Romeos. No money would need to change hands, but the backing of their respective governments could help each company move forward with these plans. Get Germany involved too as Daimler still has a stake in Chrysler.

Lest anyone think I’m crazy to think that a merger is no longer feasible, at least GM management doesn’t think so. Within their submitted restructuring plans, the following paragraph (as relayed by Edmunds) shows that the company is still open to that possibility:

“The Company has been involved in very detailed evaluations of consolidation potentials over the past few years, and its capabilities–for example, purchasing–most often are the lever pulled to create joint value,” it continues, adding, “The recent, rapid deterioration in economic conditions have made investment in the up-front costs associated with such consolidations an obviously lesser priority than addressing the immediate restructuring needs of General Motors. If the U.S. Department of the Treasury desires to explore the topic of industry consolidation, the Company would certainly be prepared to share its thoughts.”

Final Say With President Obama

Of course, the federal government will have the final say on the direction that restructuring will go. There is a chance that the feds will agree to pour tens of billions of dollars into the industry, but given that a golden opportunity is before them to restructure the savage beast, I’m leaning toward the idea that a blockbuster merger will be how everything shakes out before time runs out.