| DETROIT/NEW YORK
DETROIT/NEW YORK 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."
Cerberus declined to comment.
GM declined to comment on whether it had any talks with Chrysler, but said talks with other automakers were a routine part of business. A Chrysler spokeswoman said the automaker was pursuing a number of potential partnerships, but declined to comment specifically on GM.
Any deal would hinge on completion of the sale of Daimler AG's remaining 19.9 percent stake in Chrysler to Cerberus, two of the sources said. Cerberus last month said it had approached Daimler to buy that stake.
A Daimler spokesman could not be reached for comment.
Global Insight's Bragman said unloading Chrysler would benefit Cerberus since the private equity firm would end up with GMAC just as a $700 billion U.S. government bailout fund to buy distressed debt begins operations.
"They would get rid of an auto company that has weighed on their results, and they would get full control of GMAC just as the government is about to come to the rescue," Bragman said.
BACK TO THE TABLE
Talks between GM and Chrysler revive discussions about a potential merger that started in early 2007 when Daimler began the process of selling off Chrysler. Later that year Chrysler was sold to Cerberus.
GM Chief Executive Rick Wagoner also said last year that he saw some potential for Cerberus to combine GMAC with Chrysler Financial, the finance company affiliated with the automaker.
Analysts have questioned Chrysler's ability to survive as a stand-alone automaker, given its reliance on sales to North America for some 90 percent of its revenue.
A deal to sell Chrysler would clearly benefit Cerberus, said Gerald Meyers, a professor at the University of Michigan business school and former auto executive.
"Cerberus, to begin with, is impatient money. Their way of operating is to get in, make a killing and get out. Well, they got in, they got killed and they've got to get out," he said.
Combining GM with Chrysler would match companies with similar weaknesses, other analysts said. Both GM and Chrysler have been hurt by their reliance on sales of trucks and SUVs.
"It would be taking two cash-burning companies and put them together so they burn cash faster," said Erich Merkle, an auto industry consultant with Crowe Horwath.
GM shares fell to near a 60-year low this week on fears the global financial crisis could derail its turnaround plans. The shares closed Friday at $4.89 and have lost 80 percent since the start of the year.
On Friday, GM and Ford both ruled out bankruptcy protection as an option.
GM, Ford and Chrysler are all eligible for a share of $25 billion in low-cost federal loans to retool factories in order to build more fuel-efficient vehicles.
But the disbursement of those funds is expected to take months as regulators put rules into place that will govern distribution of the funds.
More immediately, GM could seek a direct loan from the U.S. Federal Reserve, business publication Barron's said on Saturday.
A Fed spokesman declined comment. A GM spokesman said it was not actively pursuing loans from the Fed but wanted to keep all of its options open.
(Reporting by Kevin Krolicki in Chicago and Jui Chakravorty Das in New York; Additional reporting by Ben Klayman in Chicago; Editing by Toni Reinhold)