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Sources: GM, Chrysler resolve major issues

General Motors Corp. and Cerberus Capital Management have resolved the major issues in a proposed GM-Chrysler merger, but the final form of any deal would depend on the financing and government support available, sources familiar with the talks said on Wednesday.
/ Source: The Associated Press

Some issues standing in the way of General Motors Corp. acquiring Chrysler LLC have been resolved, but others remain including the biggest: how to finance the deal, according to two people who have been briefed on the talks.

Both people said GM’s management, including CEO Rick Wagoner, would remain in place should a deal come to pass, because GM would run the combined company. Neither wanted to be identified because the talks are confidential. One said the deal isn’t close yet.

“There are issues besides financing,” the person said.

Talks between Chrysler’s owner, Cerberus Capital Management LP, are still under way. The combined Nissan Motor Co.-Renault SA also is involved, but Cerberus reportedly would prefer to have GM take on Chrysler.

Such a merger, though, has workers and government officials worried about the likelihood of severe job cuts, especially in Michigan. Industry analysts say GM and Chrysler have too many redundant operations including design and engineering, finance, and manufacturing. The acquisition would add Jeep, Chrysler and Dodge to GM’s eight brands, many of which already overlap.

A study by the Anderson Economic Group of East Lansing, Mich., released Wednesday estimated that 25,000 to 35,000 automaker jobs could be cut if the deal is finalized.

The bulk of the job losses would be in Michigan, where 8,000 to 10,000 factory employees could be let go. The consulting firm estimated that 10,000 to 15,000 salaried jobs could be lost, with most of them in Michigan. Up to 10 assembly plants could be closed.

Patrick Anderson, the firm’s CEO, told reporters that the alternative of Chrysler being sold in pieces would result in many more job losses than an acquisition. If Chrysler is liquidated, the government could get stuck with its pension obligation as well as a loss of tax revenues and increased unemployment benefit payments, he said.

Financing, the biggest component of the deal, is complex and likely will involve the federal government. GM is lobbying the Bush administration and some members of Congress for $10 billion to $15 billion in aid to help keep the company going and possibly to make the Chrysler deal work.

That could include the government, Cerberus or both taking an equity stake in GM, or direct aid and loans from the government. GM likely wants government dollars to make the numbers work to acquire Chrysler, perhaps using some of the money to shut down redundant Chrysler operations.

A congressional staffer on Wednesday said GMAC LLC, the loan company co-owned by GM, may ask federal regulators for permission to become a bank holding company. The staffer was not authorized to speak for the companies and spoke on condition of anonymity. Such a change could bolster GMAC’s bid to obtain money from the government’s $700 billion financial bailout program.

GMAC, which is 51 percent owned by Cerberus and 49 percent owned by GM, declined to comment on becoming a bank holding company, but spokeswoman Gina Proia said the finance company has been approved to participate in the Federal Reserve’s program to buy up commercial paper, the short-term debt that companies sell to pay everyday expenses and salaries.

The Fed started buying such debt this week to bolster credit markets after lending froze up in the wake of Lehman Brothers’ mid-September collapse. The resulting problems have made it difficult for many companies to access credit, and they have led many lenders, including GMAC, to tighten credit standards for car loans, hurting auto sales that sunk to a 15-year low last month.

GM, which is burning through more than $1 billion per month as it deals with the sales decline and a slowing global economy, is interested in acquiring Chrysler to access its $11 billion cash stockpile. Chrysler, however, has an unspecified amount of debt to deal with.

Industry analysts have said that at GM’s cash burn rate, it could reach the minimum cash levels required to run the company of $11 billion to $14 billion sometime next year.

The company has launched a program to save $10 billion with internal cuts and raise another $5 billion through asset sales and borrowing. But tight credit likely is hampering those efforts. Further cuts are likely to be announced when GM unveils its third-quarter earnings in the coming weeks.

A person briefed on GM’s product plans said Wednesday that the company is delaying the debut of several models and engines. The person also did not want to be identified because the plans are secret.

The trade publication Automotive News reported that the delays are designed to save money and could include the Chevrolet Cruze, a much-publicized new small car that GM has said is one of the keys to the company’s future success.

GM announced Wednesday that its third-quarter global sales numbers that were 11 percent below the same period last year. The company blamed reduced demand in the U.S. and Western Europe as it fell further behind Toyota Motor Corp. for the global sales lead.

GM sold 2.11 million vehicles in the third quarter, while Toyota’s sales for the period fell 4 percent to 2.24 million. The results bring GM’s total sales for January-September to 6.66 million vehicles compared with Toyota’s 7.05 million.

Meanwhile, the Kyodo news agency in Japan reported that GM is asking Toyota for help turning itself around.

GM spokesman Tom Wilkinson called the report speculation and said GM talks with other automakers all the time, especially Toyota, with which it shares a manufacturing plant in Fremont, Calif.

GM shares climbed more than 11 percent Wednesday afternoon after the Kyodo report and talk about progress in the GM-Chrysler talks surfaced. The shares later lost ground and closed at $6.76, up 51 cents or 8.2 percent.