Monday, October 13, 2008

Morningstar: GM-Chrysler deal wouldn't drive value

In this video, Morningstar analyst David Whiston contends that a merger of GM and Chrysler wouldn't create any value for shareholders. He feels that the unions aren't likely to approve it unless they feel a refusal will drive one or both companies into bankruptcy. As a result, the companies aren't likely to reduce a lot of costs through synergies. A Businessweek article contends that a restructuring to form a viable company would severely harm Michigan's economy.

Whiston doesn't seem to dismiss the possibility that the US government will bail out GM and wipe out equity holders at the same time. Whiston feels that if the deal doesn't go through and if GM can't raise money through a stock offering or an external investment, they would be in financial distress by the middle of 2009.

Auto makers depend on a large network of dealers in the US. A bankruptcy by one or more of the Big 3 would have a ripple effect of driving many dealers into bankruptcy.

From a public policy perspective, one needs to consider if the auto manufacturers are an irreplaceable part of American industry. I don't think they do. The US is lucky to have a highly diversified economy. If GM, Ford, or Chrysler declare bankruptcy, I would hope the US government doesn't backstop them. It would be very painful, but it would be a terrible strain on taxpayers. From a national perspective, the best thing to do is probably to ride it out. If we assume that GM goes under, Ford may take some of their market share if it starts selling its popular European models in the US.

Unfortunately, the auto companies still form the backbone of the state of Michigan's economy. Unemployment is around 10% already. The state needs to diversify its economy, but if the mid-2009 prediction is right, it's already too late. Michigan's economy will be devastated.

Additionally, labor unions have played a significant role in opposing abuses of labor rights by business. That's not to say that the United Auto Workers haven't also played their part in mismanaging the companies (demanded far too high salaries, opposed higher fuel standards). However, they would be severely weakened if one of the Big 3 were to go. That would weaken their ability to oppose business abuses.

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