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General Motors Seeks Government Aid For Merger With Chrysler

29 October 2008 - Features - Editor

U.S. vehicle manufacturing giants, General Motors and Chrysler (owned by Cerberus Capital Management), have appealed to the U.S. government for $10 billion to facilitate a merger of the two companies. The proposed package would include the U.S. government buying $3 billion worth of preferred stock in the merged company, meaning that the U.S. taxpayer would have a direct stake in the GM-Chrysler merger. Moreover, the merging companies have asked the government to take over $3 billion in pension liabilities as well as buying GM short-terms notes to strengthen the company’s liquidity. Should the merger go through, the combined company would control roughly one-third of the auto market in the United States.

Political and economic pressure is being heaped on the U.S. Treasury to prevent the bankruptcy of Detroit-based General Motors which would result in the loss of hundreds of thousands of jobs. A spokesperson for GM confirmed that, in light of the extraordinarily difficult economic conditions currently being experienced, the company is in contact with various government officials for assistance. Rick Wagoner, chief executive of GM, has been in Washington meeting with officials in this regard. Reportedly sources at the U.S. Treasury revealed that funds may be released to GM from the $25 billion that had been earmarked by Congress to be used for fuel-efficient vehicle manufacturing.

Popular car brands in the General Motors stable include Chevrolet, Saab, Cadillac, Bedford, Opel, Buick, Daewoo, Pontiac, Hummer and Vauxhall. Despite having such a wide range of brands, from luxury through to economy class, GM has lost close to $30 billion this year, while its share price is down by around 80 percent since January. New car sales were already in a downward slide when the credit crunch hit, pushing U.S. car sales figures even lower. Speaking on behalf of the Bush administration, White House press secretary Dana Perino confirmed that, in light of the fact that auto makers are important to wage earners in many regions of the United States, the request for financial assistance will be seriously considered by the government.

Chairman of the Center for Automotive Research (CAR), David Cole, noted that the U.S. government should do all in its power to keep the three main car manufacturing companies - General Motors, Ford and Chrysler - in business, as the failure of any one of them will have drastic consequences countrywide. Not everyone is in agreement with a government bailout for the U.S. automotive industry, believing that a series of bad business decisions and questionable business practices have brought them to the state they are currently in, and now they should pay the price by going bankrupt. Due primarily to aggressive cost-cutting strategies, along with the tightening of lending terms for in-house finance company Ford Motor Credit, that was taken some years ago, Ford is in a decidedly more stable financial position than its two main rivals that are seeking to merge. However, if the proposed GM-Chrysler merger receives government assistance, there is no reason why Ford should not be given equal treatment, which will strengthen the company even further.Investors will no doubt be watching with keen interest as the saga of the U.S. vehicle industry unfolds. Analysts are of the opinion that the vehicle industry’s need for assistance is yet another line of evidence that the country is heading for, or is in the beginning stages, of economic recession.

 


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