GM in early talks to buy Chrysler: source

By Megan Davies and Kevin Krolicki

NEW YORK/DETROIT (Reuters) - General Motors Corp. is in preliminary talks to buy Chrysler, the struggling U.S. arm of DaimlerChrysler AG, or to strike a strategic alliance with the rival automaker, sources familiar with the situation said on Friday.

There was deep skepticism on Wall Street about whether such a merger made sense for GM and whether it could ever happen.

An outright takeover of the Chrysler Group by GM would risk complicating the turnaround efforts of both companies, analysts said, even as it created an industry giant with a nearly 40 percent share of the U.S. market.

The talks to buy Chrysler, described by a source familiar with the situation as exploratory, were first reported on Friday by the trade journal Automotive News.

Automotive News, citing unnamed sources in Germany and the United States, said the companies were engaged in high-level talks about GM buying Chrysler Group -- which sells Chrysler, Dodge and Jeep vehicles -- in its entirety.

One source told Reuters that GM was in preliminary talks to buy Chrysler, but added it was questionable whether GM would want Chrysler's finance business, having sold its own finance arm, GMAC, last year.

A second source said talks were ongoing between the pair over a strategic car alliance but that source had no knowledge of any further talks.

GM, the world's largest automaker, and DaimlerChrysler, the world's fifth-largest automaker by global sales, declined comment.

Shares of DaimlerChrysler rose in reaction to reports of the talks. GM shares slipped at first, moved higher, then closed lower.

DaimlerChrysler shares closed up 4.4 percent at $73.33 on the New York Stock Exchange. Shares in GM closed 10 cents lower at $36.34.

Speculation surrounding a possible sale or spinoff of Chrysler has built since DaimlerChrysler Chief Executive Dieter Zetsche said earlier this week that all options were open for its struggling North American unit.

Analysts questioned whether GM would benefit from an outright merger with Chrysler, since both automakers are struggling with excess production capacity, sliding sales and a heavy exposure to trucks and sport utility vehicles.

Four months ago, GM broke off talks with Renault SA and Nissan Motor Co. after concluding that it would not have gained as much as the other two automakers from a proposed alliance.

GM and DaimlerChrysler have an ongoing joint venture with BMW to develop a hybrid system that will be used in an upcoming version of the Dodge Durango SUV.

David Feinman, a fund manager with Havens Advisors who specializes in distressed debt, said he doubted that GM would complete a deal to buy Chrysler.