Chrysler, GM have merger talks: sources

By Kevin Krolicki and Jui Chakravorty Das

DETROIT/NEW YORK (Reuters) - Chrysler LLC has had talks with General Motors Corp about a deal to combine the No. 1 and No. 3 American automakers at a time when both are struggling to cut costs and shore up cash, according to three people familiar with the matter.

Talks between Chrysler's majority owner, Cerberus Capital Management LP, and GM began several weeks ago and were initiated by the private equity fund, according to the people familiar with the talks, who spoke on condition of anonymity.

But the talks got hung up on the question of how to value Chrysler's loss-making auto operations, which include the Chrysler, Dodge and Jeep brands, two of the sources said.

At the center of the proposed deal was a swap with GM that would give the private equity firm the 49 percent stake in GM's finance company GMAC that it does not already own. In exchange, Cerberus would hand over the Chrysler auto business to GM.

But GM rebuffed that offer because it saw it as overpaying for Chrysler. It would also have meant taking on the challenge of cutting overlapping brands, dealerships, factories and union-represented workers, one source said.

Cerberus bought an 80.1 percent stake in Chrysler from Daimler AG in 2007 for $7.4 billion. It paid the same amount to GM in 2006 for a 51 percent stake in GMAC.

Although the Cerberus deal valued the No. 3 automaker at over $9 billion, a current value for Chrysler's auto operations could be less than $1 billion, the source said.

In its efforts to shop all of Chrysler or a stake in it, Cerberus contacted other companies, but those overtures went nowhere, all three sources said. Those companies included Renault-Nissan, Italy's Fiat, India's Tata Motors Ltd and Canada's Magna International, the sources said.

Cerberus also had talks with a number of Chinese automakers, including Chery Automobile Co Ltd, FAW Car Co and SAIC Motor, about access to its U.S. dealer network, two of the sources said.

The GM and Chrysler talks come as Ford Motor Co, the other struggling U.S. automaker, is planning to sell most or all of its $1.4 billion stake in Japan's Mazda Motor Co, according to a person briefed on the plan.

NOT YOUR GRANDFATHER'S BIG THREE

U.S. auto sales have fallen to 15-year lows, leaving Detroit's so-called "Big Three" automakers scratching for market share as they compete with foreign competitors in the worst financial crisis since the Great Depression.

Analysts said GM, Ford and Chrysler could be expected to take urgent measures to safeguard their cash, but they also questioned what GM would gain from a merger with Chrysler.

GM has been burning through about $1 billion per month as it looks to cut costs, sell assets and borrow to raise cash.

"On the surface, it frankly doesn't make sense," said Aaron Bragman, an analyst with Global Insight. "The acquisition of Chrysler wouldn't solve any problems GM has and would only make some existing ones worse."