Bankruptcy court can be a swell place for two companies that want to merge.
It has repeatedly been a forum for airline industry consolidation, and now, with
tottering, it may offer a similar opportunity in the auto business.
When the two Detroit icons submitted viability plans to the Treasury last week, they reignited chatter about both bankruptcy and a merger.
Laying out bankruptcy scenarios -- even as they largely dismissed them -- was a requirement of the loan agreements they signed with the government.
But talking about a merger with GM, that was Chrysler's call. "A U.S. industrial consolidation would create a company better positioned to compete with
and other non-U.S. automakers," Chrysler said in its plan, noting: "There exist further benefits from U.S. consolidation but no clear action plan with GM."
Among the synergies Chrysler laid out are joint purchasing, platform and product sharing, reduced distribution costs and other opportunities. These could produce benefits of $40 billion to $58 billion in EBITDA between 2009 and 2016, even with continuing low auto sales, Chrysler said.
Never mind that an earlier round of GM/Chrysler talks collapsed in November, or that GM has said it now wants to go it alone. In bankruptcy court, flexibility is encouraged and "you can do anything," says John Jerome, who has spent nearly five decades as a New York bankruptcy attorney.
"The dynamic created in a bankruptcy proceeding is a dynamic that makes things happen," Jerome says. "It gets creditors on the same page and it is probably the one judicial forum which gives the judge the maximum latitude to do what is fair and equitable under the circumstances, as opposed to simply applying the letter of the law."
Bankruptcy court also has the obvious advantage, made clear in the 2005 merger of America West Airlines with
, which was restructuring under Chapter 11 protection and was able to reduce labor costs and to shed unneeded aircraft leases in advance of the merger.
It went so well that the following year US Airways CEO Doug Parker tried to merge with a bankrupt
. "Our timing is driven by fact that Delta is in bankruptcy,
which presents a unique opportunity to realize values," he said at the time.
Parker estimated a merger would generate $1.65 billion in annual savings and benefits. He said more than half of that benefit would be lost if Delta left bankruptcy as a stand-alone carrier, forgoing the the right to reject leases under bankruptcy law.
Nevertheless, Delta fought him off. Delta had filed bankruptcy on Sept. 15, 2005, the same day as Northwest filed, amid widespread speculation that those two carriers would merge. As the auto industry may soon discover, having two companies in bankruptcy at the same time is like adding gasoline to the normal level of merger chatter.
In this case, the speculation eventually panned out. A key event occurred when Delta CEO Jerry Grinstein stepped down in September 2007, after using bankruptcy to remake Delta as a global carrier, albeit one that lacked a strong Asian presence. Grinstein, who had not advocated a merger, was replaced by former Northwest CEO Richard Anderson, who avidly pursued one. Six and a half months later, the deal was announced.
Another model for bankruptcy consolidation involves asset sales by bankrupt companies, although this may not be what Chrysler has in mind.
paid $330 million to buy a Miami-based Latin American route network from Eastern, which was operating under bankruptcy court protection. The purchase quickly made American the pre-eminent carrier in Latin America. The following year, bankrupt Pan American World Airways sold a Kennedy Airport-based European route network to Delta before collapsing. Building off that base, Delta has become the pre-eminent Trans-Atlantic carrier.
Besides providing a forum to effect consolidation, bankruptcy court offers a means to protect whatever investment the government makes in the automakers, says Jerome. "Bankruptcy court is regulated," he says. "You have the creditors sitting there, and a judge is sitting there, and they all have some say over the reorganization. If the debtor in possession is frittering away capital, the (parties) might choose not to come in."