The Dumb Deal Of The Week

Ulli Uncategorized 3 Comments

While this topic is a little bit outside of No Load Fund/ETF investing, it nevertheless struck a cord with me.

What happened? Chrysler announced a “shocking” plan to lay off some 13,000 workers and decrease annual production by 400,000 vehicles. Additionally, word leaked out that Mercedes is considering breaking its ties with Chrysler.

So far, this sounds like a good business decision to me, although I fail to understand why it took them 9 years to come to that conclusion. To me, it was a questionable deal to begin with, and I am not sure if it was simply ego driven (let’s see if we can do it) or if there were actual business fundamentals involved.

I think that the original takeover was based on the false premise that if Mercedes was in charge and could improve the quality of the Chrysler cars, higher profits would surely follow. As it turned out, this is a good news/bad news scenario.

The good news is that the quality of the cars has indeed improved remarkably. I can personally attest to that, since I am on my third Jeep Grand Cherokee/Laredo. The latest model was really a step up in terms of handling and overall design, which pleased me as a consumer. I am even more pleased by the fact that, for the latest model 2006, I paid about the same, if not slightly less, than for my first one 15 years ago.

That is not what Mercedes had in mind when they took over Chrysler.

I am sure that, along with an increase in quality was supposed to be an increase in price. This is where the bad news comes in. Mercedes miscalculated by not considering the “image factor” of the American car buyer. Unfortunately, as is well documented, American car manufacturers can only sell their cars if the accompanying offer includes a steep discount, a cash rebate or zero percent financing. It’s a sad fact of life.

Okay, so Mercedes looks to streamline the operation or possibly sell the Chrysler division to someone else. That’s understandable.

Here’s where it gets strange. The first suitor expressing an interest in such a deal is General Motors.

Huh?

A company in dire straights, which has not been able to compete in 30 years, has financial difficulties in most of their enterprise, including their sub prime loan division, and they’re still thinking they’re king of the hill.

If the Germans can off that albatross called Chrysler to GM, I have to worship the ground they walk on. If GM actually goes through with it, it’s got to be the dumb deal of the week or even the year.

I really would like to understand the reasoning, but I just can’t seem to figure it out. If you have some logic as to why Chrysler would be a good fit for GM, please share it with me.

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Comments 3

  1. Ulli,

    Maybe GM is considering the following scenario (speaking of scenarios!):

    “How can we [GM] maintain our ‘largest car maker in the world’ despite the fact that we’re constantly losing ground to Toyota, et al.?”

    I don’t know the exact numbers, but maybe the thought — in answer to the above question — is, “If we [GM] can buy Chrysler off of Daimler, then at least our market share will continue to ‘be big’.”

    I didn’t say it was the best — nor the most rational — scenario they could be considering, but when a company is up against the wall and its stock has recently climbed roughly 20% for the year (disclosure: I’ve had a small position in GM since January, 2007), and when it’s been king of the hill for decades, that’s a lot of ego to try to contain on a cash flow statement!

    There is, however, some logic in the scenario, albeit extremely myopic thinking. I thought it was interesting to read an analyst saying that GM is actually a benefits actuary company who happens to sell “crappy” — to use their term — cars. The stock shot up on word that they’re going to do a deal with their healthcare issues.

    All of that would make sense to me, assuming that they refuse to consider themselves number 2 in the industry. Longer term, I’m just glad I’m familiar with trailing stops, just in case!

    -Phil

  2. When a company is run by an entrepreneur, it is one thing, but when a bureaucrat climbs the corporate ladder, it is a horse of another color.

    GM has been managed by bureaucrats for a lot of years now. I’ve owned GM products and they were always lemons. Possibly their trucks are better than their cars, but my experience convinced me to stick to vehicles manufactured by others–like Toyota or even Crysler.

  3. Somewhere in the press releases for this deal must be the line “to enhance shareholder value”. Isn’t that the reason for every merger, sell, aquisition, leveraged-buy-out? It’s all in the name of looking out for the shareholders, isn’t it?

    Enough joking. After reading books like “Barbarians at the Gate”, my suspicious and skeptical mind now works like this: any deals of this ilk are done for one reason, to enrich the few at the top of the pyramid.

    But whether my opinion is justified or not, it still makes the case for why I’m here. Namely NTF MF/ETF investing. The market will not compensate you for the added risk you take on by speculating in individual securities like GM. Because that risk can be diversified away.

    That is why I invest in asset class indexes and I don’t speculate (gamble) on individual securities. You can’t diversify away the difference between Large-Cap and Small-Cap. Or Value and Growth. But you can diversify away the risk of owning GM, by also owning the broader stock market.

    I can’t offer a sound business reason for GM absorbing Chrysler. For me, the GM/Chrysler story provides little more than entertainment.

    G.H.

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