General Motors Case Study: GM's Case Study

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When GM gave up control to Cerberus, they got in a pickle...It [Cerberus through GMAC] has taken away flexibility from dealers" (Welch 2008). "GMAC also said it will suspend bonuses to dealers who earned the lender's Platinum designation for bringing the firm strong buyer volume" (Welch 2008). This essentially discourages dealers who engage in hard-sell tactics, and encourages consumers to take on 'more car' than they can afford. But the belt-tightening comes at a time when GM desperately needs to raise its sales: "GM is burning through at least $1 billion a month. It had access to about $21 billion cash and $5 billion in available credit at the end of June but an analyst Friday said the automaker will probably need $10.3 billion in fresh cash through next year to maintain a minimum liquidity of $14 billion (Snell & Tierney 2008)

Cerberus is likely to play an increasingly critical role in GM's future as merger talks are continuing between General Motors and Chrysler. Chrysler is owned by Cerberus Capital Management. As part of a merger deal, GM might contribute some or all of its equity in the finance company to Cerberus (Vlasic 2008). "But people close to the merger talks said that Cerberus had proposed to contribute cash to GM-Chrysler in addition to the estimated $11 billion in reserves that Chrysler has on its books. In return, Cerberus would receive equity in the combined company and become a large shareholder" (Vlasic 2008). Cerberus, industry analysts speculate, would actually like total, 100% control over the GMAC mortgage and auto loan unit and to sell Chrysler to GM entirely (Snell & Tierney 2008).

Insiders believe that Chrysler, which has a long list of insolvent and outdated car models still in production would not be a sound investment for GM, and GMAC's recent decision to cut off credit lines to all but a few select borrowers may be a ploy by Cerberus to pressure GM to agree to the Chrysler merger.

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"While GMAC claims the reason for the move is because of the frozen credit markets, its timing seems curious. After all, it seems Cerberus is desperate to dump Chrysler, and has talked with any automaker willing to listen in the last few weeks...with GM, Cerberus has an attractive tool to get the carmaker to the table, GMAC. GM can free itself from GMAC's [mortgage] losses [in the housing market] if it simply trades its stake in the finance company for Chrysler. Additionally, Chrysler has cash on its books that GM could use -- assuming it doesn't have to disperse it (either as payment or through litigation) to Chrysler dealerships when they are shut down" (Wurtzel 2008).

Conventional wisdom holds that mergers are a bad idea. In fact, a common business adage is that if you predict that a merger is likely to 'go south' without even looking at the financial statements of either companies, you prognostication is likely to be correct. Merging two failing companies with similar problems outdated models and underperforming factories would seem to be a recipe for disaster, but GM may have to do so simply to keep lines of credit flowing between itself and GMAC. Desperate times call for desperate measures and GM is desperate. However, if it does acquire Chrysler and sheds GMAC's real estate-related debt, GM must engage in a rigorous program of cost-cutting and consolidation of both its operations and Chrysler, and be willing to weather an even more painful period of cutbacks and layoffs than it has experienced before.

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