Saturday, February 17, 2007

How GM could buy Chrysler

For GM to buy Chrysler, the deal would have to be very attractive to both GM and the Daimler management faction within DaimlerChrysler. Chrysler has enough liabilities, especially plant and labor-related, to make a simple purchase at this time rather unattractive to GM. I have an idea, the kind that would appeal to greedy Wall Street investment banks. Simply spin off Chrysler and issue bonds in lieu of shares to DaimlerChrysler shareholders. Those bonds would trade as an alternative to stock, but guarantee that shareholders will get at least a semi-decent "deal" if if an independent Chrysler falls into bankruptcy or otherwise deteriorates before GM finally decides to acquire the bonds on the open market. In a stock deal, bankruptcy would wipe out the shareholders, rendering such a spin-off a very unattractive deal. A multi-step deal such as my bond idea is necessary because the liabilities, primarily labor-related, cannot be easily put in a box and written off at low cost. Labor would extract a price much higher than GM would rationally be willing to pay.

The key here is that Chrysler with its liabilities is a drag on Daimler. Better for DaimlerChrysler to fully finance the bonds at 100% of par, with the expectation that the bonds on the open market will rapidly fall to a price level where GM could make a financially justifiable argument for buying the bonds at such a fire sale price.

Any such fire sale would presumably occur only after the independent Chrysler either renegotiated its most onorous liabilities away or simply went into bankruptcy and defaulted on the bonds which then puts the bondholders (i.e., GM or whoever wanted to buy the bonds on the open market at the fire sale price) into control and leads to bankruptcy court approval to force labor to make the needed concessions before the bondholders (led by GM or whoever it wanted to partner with) decide how to best dismember Chrysler and integrate the viable pieces of business into GM's business. Some pieces might be sold off to other firms or even leveraged buyout firms who have other ideas for pursuing any hidden value of the pieces.

DaimlerChrysler shareholders who get stuck with these bonds could in fact go along for the ride and eventually become GM shareholders, or simply dump the bonds and get a gain from the tax loss. The real point is that the liabilities of Chrysler are a hidden drag on DaimlerChrysler's stock price, so taking a loss on the bonds could well significantly reward those shareholders who then have shares in a firm with a better balance sheet and streamlined operations.

Wall Street could of course collect boatloads of cash, both in fees to structure such a complex "deal", and profit on the side by trading the bonds as their price fluctuates wildly while the terms of the final deal slowly wend their way to a conclusion.

I'm sure there are lots of details that I have glossed over, but at a minimum this is an interesting thought experiment to evaluate the prospect of any deal for GM to acquire the Chrysler business from DaimlerChrysler.

-- Jack Krupansky


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