25 May 2007

Not what I expected

I admit, recent developments in the auto industry have taken me by surprise.

As my faithful readers may remember, my working theory has been that the US domestic auto industry will integrate with -- in effect, in will become an arm of -- the petroleum industry.

The profit margin is with the blades, not with the razor that holds them. The economic significance of the razor is to lock you in to buying the blades that fit it. The economic significance of an automobile, likewise, is to lock you in to buying an endless stream of petroleum. So: why are the two industries not one already?

The reasoning still seems sound, but ... the restructuring of the domestic auto industry has been well underway all spring, and has gone in a very different direction. There's been an auction for Chrysler of late, and none of the oil companies even stepped forward as a bidder.

Why not? The puzzle, for me, is compounded somewhat when I look at their stock buybacks. They've been very aggressive in buying themselves of late. ExxonMobil has spent close to $48 billion over the last two years in buying its own stock. There are lots of reasons why companies do this. They might want to avoid dilution, they may want to discourage a proxy fight or a takeover.

But another reason a company buys its own stock is ... to have it to offer again as part of the price of an acquisition, which may be preferable to a cash-only deal.

BusinessWeek recently quoted an Oppenheimer analyst who said: "ExxonMobil could go tomorrow and buy a company for $100 billion using its own stock."

So, why not Chrysler? It may well be hoping that the big prize yet falls into its lap -- that it can offer those shares in return for control of General Motors, the (domestic) Razor king.

Or my theory about the synergy to be found in such a combination might just be wrong. That's a possibility, too.

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Knowledge is warranted belief -- it is the body of belief that we build up because, while living in this world, we've developed good reasons for believing it. What we know, then, is what works -- and it is, necessarily, what has worked for us, each of us individually, as a first approximation. For my other blog, on the struggles for control in the corporate suites, see www.proxypartisans.blogspot.com.