By Jennifer Yousfi
Shares of Ford Motor Co. (F) and General Motors Corp. (GM) posted gains yesterday (Tuesday) on speculation that consolidation in the U.S. domestic auto industry could be the struggling sector’s saving grace.
Over the last three trading sessions, Ford shares are up almost 18%, while GM shares are up over 37% on reports of possible merger talks and asset sales.
Both stocks have been hammered year-to-date, with Ford shares having plunged over 63% and GM shares down a staggering 74%. Declining sales have seen the automakers’ stocks touch lows not seen in decades.
Waning U.S. consumer spending and high oil prices have hit domestic automakers that have long relied on large trucks and sport-utility vehicles (SUVs) as the cornerstones of their product offerings. U.S. firms have been slower than their foreign counterparts, such as Toyota Motor Corp. (ADR: TM), in adopting the now popular fuel-efficient hybrids and smaller car models.
But both GM and Ford have said that bankruptcy is not an option they will consider. The automakers are aggressively pursuing two different paths to try to return to profitability. While GM seeks out a potential merger, Ford is selling off assets.
GM and Chrysler in Talks: WSJ
The Wall Street Journal reported over the weekend that GM has had talks with private-equity firm Cerberus Capital Management LP over a possible sale of the hedge fund firm’s 80.1% stake in Chrysler LLC. In addition to its marquee Chrysler brand, the automaker produces the Dodge and Jeep lines.
However, Chrysler is the weakest of Detroit’s “Big Three” and its line of Dodge Ram pick-ups and Jeep SUVs have been poor sellers in the current economic environment, which casts doubt on the validity of that report.
“Ford and even GM have been trying to shed unprofitable brands, so why would CEO Rick Wagoner go out and purchase brands that are struggling?” David Silver, an analyst at Wall Street Strategies Inc. (OTC: WSSSQ), told MarketWatch. “Chrysler is burning through cash at an alarming rate, and that coupled with GM's cash burn would just push GM closer to disaster.”
Efraim Levy of Standard & Poor's Equity Research agreed that a merger might not be the best route to take for beleaguered GM.
“Given the marketplace and restructuring challenges faced by the automakers, we think a merger would be counterproductive," Levy said, MarketWatch reported. “On the other hand, if GM would get access to Cerberus's capital, we could see positives for the automaker.”
Labor unions have also expressed their discomfort with a possible deal between GM and Chrysler would be beneficial.
“We have not had any discussions formally with any of the companies,” United Auto Workers President Ron Gettelfinger said yesterday on Detroit radio station WWJ, Bloomberg News reported. “I personally would not want to see anything that would result in a consolidation that would mean the elimination of additional jobs.”
But with U.S. auto sales at 15-year lows, job cuts at automakers are likely to occur with or without a potential merger, which could lead to eventual capitulation from the union.
“I think you could convince them,” David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan, said of the unions, Bloomberg reported. “Profitability over the long term is the only job security these guys have.”
Another Ford Divestiture
GM approached Ford about a potential merger, as well, according to news reports, but the company founded by automobile pioneer Henry Ford is determined to go it alone.
After having already sold Land Rover and Jaguar to Indian carmaker Tata Motors Ltd. (ADR: TTM) for $2.3 billion, Ford is now shopping its one-third stake in Japan’s Mazda Motor Corp. (PINK: MZDAF). Ford owns approximately 33.4% of Mazda and would like to sell a 20% share of the Japanese automaker.
And the buyer is likely to be one of Japan’s own, as Mazada’s main bank Sumitomo Mitsui plans to “do whatever they can to prevent this from happening” if Ford selects an unwelcome buyer, according to Credit Suisse Group AG (ADR: CS) analyst Koji Endo, BusinessWeek reported.
Two leading Japanese trading houses, Sumitomo Corp. and Itochu Corp., are the most interested bidders at the moment. It seems likely one of the two will come out on top as the winner for the Mazda stake.
Ford could certainly use the cash and the sale could also have benefits for Mazda, according to Takaki Nakanishi, JPMorgan Chase & Co. (JPM) analyst. Nakanishi feels the sale will allow Mazda more freedom in decision-making, while mainting its close ties to Ford.
“The synergy between the two companies is very significant, but we think they can produce this synergy without the management control inherent in its parent-subsidiary relationship,” Nakanishi said in a research note dated yesterday, Reuters reported.
News and Related Story Links:
Ford Still Shopping Mazda Stake; Tata Uninterested
GM-Chrysler Merger Talks Exaggerated by Media
Auto Union Chiefs Say They Wouldn't Back GM-Chrysler Merger
Buy, Sell or Hold: Ford Motor Co.