A lot of news energy has suddenly been released in the last couple of days regarding the Chrysler Group of DaimlerChrysler. All speculation on who will purchase Chrysler from the Daimler parent company.
It would seem to be a mistake for DCX to spin out Chrysler and undo the acquisition. I worked at Chrysler when the merger was announced, in fact I went up the elevator with two of the executives in the inner circle of that endeavor the day the European Wall Street Journal broke the news (one very interesting elevator ride). One of those two executives would later become CEO of the Chrysler Group, briefly. I was on some of the high level merger integration teams, worked through some of the concepts and processes that would be used to generate the savings to pay for the project. Some original research I did directly helped a later Chrysler CEO understand the company background and future for an improved company.
What DCX shareholders and their board of management forget is the Chrysler Group, while now troubled (again) does really offer more opportunities and strengths. Chrysler thins out the massive Mercedes R&D to shoulder some of the financial burden. A couple of years ago Mercedes was deep in loses and the Chrysler Group generated cash that kept Mercedes going. That give and take is what the original acquisition was meant to do. And the two companies are still integrating, sharing concepts both directions across the Atlantic. But it appears that the decision has been made to spin out Chrysler on its own.
General Motors has been the most frequently cited suitor for the company. Many experts are pointing out that GM doesn’t need Chrysler because they directly match each other in every segment. But I think a lot of reasons make the deal attractive for GM, provided the price is kept reasonable. GM has been down, but I think they have been improving on many fronts and are way ahead of the news reporters on their real comeback. Buying Chrysler would give them a little more swagger and defend their market share numbers against Toyota.
Here are the best reasons that GM should pursue Chrysler:
1- Jeep. Chrysler purchased AMC in 1987 to get one brand, Jeep, which still ranks in the very top of globally recognized brands. DCX may have been squandering the brand a bit in the last few product launches, but the name has meaning for a lot of consumers. And Bob Lutz was involved with some of that purchase the prior round.
2- Minivans. GM and Ford announced they are exiting their own minivan programs. Cross-overs get more press, but minivans offer the room and fuel economy that truck based SUVs certainly lack and generally more cargo space than CUVs. Chrysler’s minivans have generally filled two assembly plants with product while producing innovations that Toyota and Honda end up benchmarking.
3- Powertrains. (a) Transmissions. GM and Chrysler are already partners at New Venture Gear to produce transmissions for each other. So why not bring this all in-house? (b) Hemi. A strongly branded platform in its own right. The only engine that “average consumers” know about, unless you count “V6″ and “V8″ as “brands”… Look what Intel did with their “Intel Inside” stickers for the potential value.
4- Assets. GM can purchase the assets of Chrysler without pulling through the pension liabilities and other headaches that GM already struggles with. GM (actually any buyer) can come in and offer everyone a job at the new company but under radically different terms. They might even be able to choose which plants they really want (Hemi, Jeep, and Minivan) and pass on the others.
5- Costs. There is a lot of opportunity to reduce and eliminate costs between the two former competitors. Redundancies are expansive and can easily be uncovered (contact me if you’d like some help, whether your GM or the corner grocery, we can help).
The risk is that GM gets in a bidding war and pays too much for Chrysler. There is a fine line between determining value and folly. As long as GM keeps their wits in the heat of the inevitable auction they will do fine.
So Detroit will once again be on the nation’s newspapers and for something a little more interesting that the typical read.
Investment disclaimer: While I don’t currently own any shares of DCX or GM, I have owned shares in the past, as well as worked at both companies in various capacities.
Cheers!