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Desperation all around... - Views on News from Equitymaster
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  • Oct 13, 2008

    Desperation all around...

    Big Auto's desperation for survival...
    Struggling to survive amid declining sales, slowing global economy and an unprecedented credit crunch, General Motors (GM), US' largest automaker has initiated talks of a potential merger with Chrysler, the third largest. These overtures by GM come after the company's proposal to combine with the second biggest automaker - Ford Motor Co. - was rejected by the latter last month.

    As reported on CNN's financial website, "A tie-up between the automotive giants would be historic for the industry and solidify GM's position as the global sales leader, which it has been in danger of losing to Toyota Motor Corp."

    However, we believe that by coming together of these firms, the problems might in fact magnify than disappear. It's a case of combining two failing firms in the hopes of creating one healthy one, which does not give an impression of being a win-win deal for both. In fact, managerial attention that needs to be towards making the businesses healthy on a standalone basis will now be diverted to a complicated integration.
    The problems for US auto companies like GM, Chrysler and Ford are not new. They have been burdened with high cost operations and a shrinking market for fuel guzzling vehicles for many years now.

    GM has in fact not made money since 2004. Ford is expected to continue to incur losses till 2012. And now Chrysler has indicated that it will not be profitable this year. These companies are under tremendous pressure to cut costs and increase liquidity for funding their survival and growth plans. It is possibly this desperation that is driving the merger talks between GM and Chrysler.

    ...and ICICI Bank's for sanctity
    India's biggest private sector bank has resorted to police complaints and SMSes in an act to relieve investors and depositors respectively from the rumours about its ill health. "Your bank is well capitalized with good liquidity. Please do not listen to baseless rumors,'' says an SMS from the bank. It has also filed complaints with the Mumbai and Coimbatore police alleging that 'certain brokers were indulging in malicious rumour-mongering'. Well, the bank calls it 'economic terrorism'.

    Oil's sharp decline
    What made headline news a couple months of months back is now on the back burner amidst the more important news of central banks acting to save the world economy from shifting into a deep slump. We are talking about crude oil prices, which have declined by almost 45% since hitting their all time high of US$ 147 a barrel in July 2008. A barrel now costs US$ 80.

    The sharp decline in oil prices has been brought about by expectations of slowing demand on the back of deteriorating economic conditions worldwide. The International Energy Agency (IEA) has in fact projected that global oil demand will rise a meager 0.5% in 2008. This will be the slowest annual rise since 1993, when demand actually declined by 0.2% YoY.



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