The Urge to Merge

I’ve written more columns on more potential problems inside the automobile and energy industries in the past eight months than I have in the last decade. Some covered the excessive speculation that caused oil to spike to almost $150 per barrel and gasoline to shoot over $4 a gallon, while others commented on the housing market being driven to excessive heights by easy and cheap credit. But we all seemed to miss that the world’s financial system was headed toward a near total collapse, brought on by unwise lending on those same exploding bubbles – oil and home prices. And as a result of the downturn, automakers worldwide have come under great financial pressure.

All of these issues are interrelated. And they have much in common, though the media seems not to perceive the connections.

I find it amazing that the most recent drama in Detroit, the possible merger between General Motors and Chrysler, is seen as being directly related to extremely poor management decisions and poor product lineup against current consumer demand. I say amazing because, though the exact same financial situation exists with many of our best-known investments and commercial banks, but that’s not what’s being said about Wall Street. –Wall Street gets excuses; Detroit just gets the blame.

Likewise, a year ago U.S. refiners were making a fortune on each gallon of gasoline they wholesaled to distributors and retailers, but this year the exact opposite has happened. While much has been made of the drastic fall in the value of GM or Ford’s stock prices, no one is discussing the fact that Valero Energy, one of the nation’s premier petroleum refiners, has seen its stock price fall from $75.75 to a pathetic $18.12 a week ago.

Against the Historic Trend

Today’s big story is that General Motors is negotiating to make Chrysler-Jeep-Dodge part of the GM family. By the time you read this, that deal could be a reality – or not. Still, it might be good to go over what has been going on in the background on this situation. But with one caveat: This is information that is widely believed, and most of it’s verified; but years from now when the final history of this economic period is written, we might find that a few of the more important facts were not accurate at all. That being said, here’s the current story.

For perspective, history shows that automotive mergers rarely if ever succeed. The list is fairly long for just the last 50 years: Studebaker/Packard; British Motor Company/British Leyland; Ford/Jaguar; American Motors/Renault, BMW/Rover; and Daimler/Chrysler are the mergers that come to mind quickly. They all show how perilous it is to force two often conflicting automotive cultures together. But that’s not to say that all mergers end in disaster.

After all, General Motors started life as Buick and brought many other automotive firms into the corporate fold; and for the next 90 years GM seemed to do fairly well. Likewise, Chrysler restarted Dodge in the ’20s and had a decent 40-year run as that combination. And Lee Iacocca purchased Jeep for Chrysler in 1988 – and today the Jeep brand is considered one of or maybe the most valuable part of Chrysler LLC.

So why do some mergers succeed and others fail magnificently?

Pride Goeth Before a Fall

Cerberus insisted to the media when they were given Chrysler that they would not be short-term owners of the automotive properties; (while privately suggesting to others that they would teach Detroit a thing or two about how to run a car company) shortly thereafter, however, the nation’s economic situation turned rather dramatically. Then too, Cerberus made one huge mistake in taking over Chrysler: Though its first choice for CEO of the new company was Wolfgang Bernhardt, at the last minute for some reason Bernhardt was out and Bob Nardelli was in.

The business media was ecstatic that one of Jack Welch’s former General Electric protégés would finally be given the chance to show Detroit how modern American corporations should be run. Brilliant Nardelli may be, but Detroit is already full of hard-nosed, cost-cutting accountants and executives. What’s most often missing from troubled firms is the brilliance of real car guys, guys who have a passion for style and a second sense about what the public is going to want next for their transportation needs. Not only would Bernhardt have brought that experience back to Chrysler, but Chrysler dealers loved the guy. If he had become Chrysler’s CEO, his motivational impact on dealers across the nation would have translated directly into far more sales than are currently being delivered.

The smart thing Cerberus did was force Daimler to keep the lease portfolio on Chrysler products, which all but guaranteed that Chrysler Financial wouldn’t lose any money on those loans. As a result, the Chrysler Financial portfolio is actually performing decently. The downside is that Cerberus had to recreate much of Chrysler Financial from scratch, because so many individuals and systems stayed with Daimler.

Cerberus also purchased 51 percent of GMAC, and well understood that if they could merge the two financial giants, their operating expenses could be cut dramatically – and getting their combined credit ratings upgraded would become a real possibility.

This Deal Could Work

On the automotive side of things, Cerberus inherited the scrappiest, most streetwise group of new car dealers in America. (Let’s face it, given no fewer than seven major financial downturns since 1973, if Chrysler dealers hadn’t been that way the entire company would have failed.) But, since Cerberus had only $11 billion or so in the bank, new product development was going to have to take a bit of backseat to conserving cash for any other financial eventualities. So, when negotiations began, Cerberus first offered to buy the 49 percent of GMAC it didn’t own from General Motors.

Cerberus would combine the two firms into one major automotive financing powerhouse; in return GM would get a major minority position (believed to be 23 percent), and GMAC Chrysler Financial would be born. Then GM would take over Chrysler, Dodge and Jeep, get control of the $11 billion in their bank accounts, and add Chrysler into its current and ongoing downsizing programs to get the maximum economies of scale.

GM would increase its cash on hand by 25 percent, keep Chrysler’s newest, highly productive factories going and close the rest – and come out of this a lean, mean fighting machine. And it doesn’t hurt that GM’s current vice chairman, Bob Lutz, was the man most responsible for making Chrysler America’s hippest car company in the nineties. (Chrysler was also the most profitable volume company in the world per car until Daimler bought them in 1998.)

Of course, the naysayers are already out in droves, chorusing that merging two car companies in financial straits will only serve to make both of them weaker. But now it’s time to see why most automotive mergers fail, while others succeed.

…And a Haughty Attitude Before Destruction

When Daimler bought Chrysler, BMW purchased Rover, or Ford acquired Jaguar, the buyers became the dominant force in the new group. Many believed that Daimler’s German officials had only contempt for their American counterparts, and that often seemed to be true if one watched their decision making. And the same can be said for BMW’s attitude toward Rover or Ford’s toward Jag – after all, did anyone believe you could take a lowly mainstream Ford Mondeo and make it an expensive Jaguar that the public would lust over?

On the other hand, when Chrysler bought AMC Jeep, Iacocca had tremendous respect for their management, engineers and designers. In spite of their financial problems, Iacocca realized that AMC-Jeep had accomplished more with little or no money in the bank than any other car company in the world.

It should also be noted that in GM’s heyday, the executives they acquired with automotive acquisitions were not only welcomed into the GM fold, but those who had once run the formerly independent operations of Cadillac, Chevrolet, Oakland, Hyatt Roller Bearings, Champion, or Delco often became the same individuals who would go on to run General Motors and become the lionized icons of the automotive industry.

Yes, when automotive mergers have been done under the guise of picking up assets and installing what the new owners believe to be superior operating processes, those mergers have all failed badly. But when the buyer realizes that the best part of a potential merger is the talent that they will bring into their organization, those mergers have tended to be successful.

Put another way, when the arrogant and self-centered buy or merge a car company, those deals don’t work. But the self-effacing buyer quickly finds that it was the human talent – not the plants or the equipment or the cars – that made the acquisition smart.

How would a GM Chrysler deal work? I have no idea. But if I had a car company and you asked me if I would hire Bob Nardelli or GM’s Rick Wagoner to run it, I’d be for sending Bob back to Home Depot – assuming they would take him back.

© 2008 Ed Wallace

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism, given by the Anderson School of Business at UCLA, and is a member of the American Historical Society. He reviews new cars every Friday morning at 7:15 on Fox Four’s Good Day, contributes articles to BusinessWeek Online and hosts the talk show, Wheels, 8:00 to 1:00 Saturdays on 570 KLIF. E-mail: wheels570@sbcglobal.net