daimler chrysler bonds
Two Mergers--One is Insane
"Two Mergers--One is Crackers" by Oren Harari. October 21, 2008
There are two altered consciousness-profile mergers in the works principled now: Wells Fargo-Wachovia and GM-Chrysler. So heres a small quiz question. Which merger has a appealing good chance to create value for investors and customers, and which one is so destructively gormless that the executives shilling for it should be publicly outed as self-serving incompetents and then summarily ousted?
There should be no dubiousness as to the correct answer. Yes, integrating the cultures, systems, personnel, services, et al of Wells Fargo and Wachovia will be a big summon, particularly in todays volatile, distressed monetary markets. But its do-able, and it makes some mother wit. Why? Because, first, Wells has built its growth and position not via serial acquisition like Citigroup did, but by pursuing monetary discipline (WF has maintained its profitability because it did not indulge the Kool Aid of mortgage-backed securities) and by maintaining a in keeping focus on boring fundamentals like lending, buyer service and cross-selling. Sponsor, while most of Wells Fargos growth has been inherent, its historical forays in acquisitions (like the Norwest dispense ten years ago) have been carefully vetted and methodically implemented. Third, CEO Dick Kovacevich is not a Ive gotta be the biggest megalomaniac. He seems to be more caring with performance excellence in the grubby details of banking than with contract making and growth for growths reasons. In fact, he has a healthy wariness of scope, noting that often, you dont get better by being bigger. You get worse.
Anyway, the cost was good--Wachovia, sinking in stale subprime-based assets, was not in a stupendous bargaining position (though Im still perplexed as to why Wells offered $15 billion when Citi, the unprecedented suitor, was prepared to pay $2 billion). So now Wells Fargo will pale big gains in brokerage and asset government businesses from Wachovia. Even more important, Wells will heighten its retail presence east of the Mississippi. So this is a somewhat clean, reasonably non-redundant additive get ready. At the end of the day, Wells Fargo will boast a sail-to-coast franchise with the largest lay down base in the country. Kovacevich improved get used to managing size, but hes shown that hes one of the few banking leaders today who can conceivably drive it off. Most mega-mergers wind up at the last destroying shareholder value (did you skilled in that?), but given todays consonant market context and Wells Fargos life, this deal has a higher-than-average good chance of succeeding.
On the other hand, the GM-Chrysler merger is a delusional disrepute. Both companies are hemorrhaging sales, scratch flow, and market cap. Does any reasonable individual honestly believe that if these two staggering, limping dinosaurs marry, they will suddenly give birth to a wave of detached products, fat margins, and sizzling ferment? GM, the buyer, is already burning through more than a billion dollars in legal tender every month. The financial health of both these firms is so bad that GM cant even secure financing for the stock. On top of that, Chrysler just got out of a miserable ten year wedlock with Daimlerand now it wants to promiscuously jump in bed with another born loserwith the same seedy rationale: economies of register, reducing cost redundancies, blah blah blah.
Taxpayers ought to be outraged. We even-handed gave the Big 3 carmakers $25 billion in guaranteed loans, and precisely now as you read this, GM and Chrysler executives are lobbying the direction for more financial assistance to clinch the have to do with.
Investors ought to be outraged. Their forerunner will go into a death spiral as the new company drowns in costly administration, political in-fighting, and debt. The only on cloud nine campers will be the executives who can quickly get out of Prevarication (no pun intended) after pocketing their millions. Chrysler CEO Robert Nardelli, having walked away with $200 million after screwing up Haven Depot, is well positioned to do an obscene encore if this parcel out goes through.
Let me revisit something I wrote in my libretto Break From the Pack, which I think is germane to this colloquy:
Perhaps the greatest delusion executives have about mergers is the reliance that somehow two bureaucratic, backward-looking corporations will marry forces and spawn an impregnable colossus. The underlying assumption is that two companies that have severally managed to generate flat earnings and declining allowance will be able to magically continue their luxury-zone strategies by jumping into bed together
.Done, a merger might temporarily prop up any two beasts by providing them well-advised scale and marketing, but the end result is still notable vulnerability, if not extinction.
GM and Chrysler may indeed become extinct, uncommonly if they create a complex, bloated heinousness that will inevitably return to the government trough for further bailout. Ford might too, having merely achieved a CCC bond rating, the lowest litter status available.
I feel bad for many of the employees in these companies. But while Toyota, Honda and BMW pursue to create jobs in the U.S., the Big Three have cut more than 100,000 jobs since 2005. And if this GM-Chrysler take care of goes through, more than half of Chryslers 66,000 employees will give the slip their jobsbecause GM plans to use Chryslers $11.7 billion exchange hoard to shut down most of Chryslers operations while keeping its brands!
In compact, dont let the architects of this deal sell it by appealing to the hoary American jobs arguments. Its a imitation argument. Its an insane deal. If youre flourishing to support a merger with your investment dollars, go for Wells Fargo.
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