Are GM and Chrysler Closer to a Merger?

Oct. 17, 2008 — -- Chrysler may be close to surmounting a stumbling block to a merger with General Motors or another automaker.

Cerberus Capital Management, which owns a majority stake in Chrysler, is nearing a deal to buy out Daimler AG, which owns nearly one-fifth of the beleaguered American car company, Reuters has reported.

Before Cerberus can work out any merger deal, the private equity firm must have full ownership of Chrysler, said Aaron Bragman, a research analyst for the economic analysis firm Global Insight in Detroit.

"Daimler has said they don't want to be a part of a merger deal," he said. "It's a procedural issue where [Cerberus has] to get the remaining part" of Chrysler.

At this point, Bragman said, "it's a foregone conclusion" that Cerberus wants to sell Chrysler.

Cerberus did not immediately return calls for comment. Daimler and Chrysler declined to comment today on the progress of the talks.

While neither GM nor Chrysler has confirmed that they have entered into merger talks, buzz has continued to build about the potential combination of the two ailing auto giants.

Both GM, the U.S. largest auto company, and French automaker Renault have reportedly expressed interest in Chrysler, though a Renault spokeswoman told ABCNews.com today that Renault denied any discussions with Chrysler.

On Thursday, Chrysler chief executive Bob Nardelli said in an interview on CNBC that slumping auto sales have created "an environment for consolidation, where you can get synergies of productivity that will allow you to be more competitive not only here in the U.S. market but on a global basis."

Chrysler spokesman Ed Garsten cautioned observers not to read too much into Nardelli's comments.

Nardelli, he said, was alluding to "arrangements where companies work in cooperation for each other's benefit," such as Chrysler's recent agreements with fellow automakers Nissan and Volkswagen. Chrysler is building pickup trucks for Nissan, while the Japanese automaker is assembling a compact car for Chrysler. Chrysler has also built a minivan for Volkswagen.

Financing challenges may be holding up any sort of deal between GM and Chrysler, the Detroit Free Press has reported. Meanwhile, industry watchers have questioned whether a GM-Chrysler merger would actually prove to be in the best interests of either company.

"My general theory about the merger is if you take two sinking ships and put them together, all you've created is a Titanic," Richard A. D'Aveni, a professor of strategic management at the Tuck School of Business at Dartmouth College, recently told ABCNews.com.

There has been speculation that GM might be interested in buying Chrysler to take advantage of the car company's coffers. As of June 30, Chrysler had $11.7 billion in cash.

If that's the case, Bragman said, it could spell the end of Chrysler.

"If the main motivator for GM is really to get after that money, that means they're going to have shut everything else down because Chrysler itself has financial obligations and financial needs that that money is funding," he said.

D'Aveni and Bragman agree that, overall, the problems suffered by each automaker won't be resolved through a merger of the two.

Bragman said that while GM would stand to gain market share by merging with Chrysler, the new combined company would also lose money because it would have similar models, like the Dodge Ram and the Chevy Silverado, competing against each other for buyers.

D'Aveni said that the historical strife between the two companies also doesn't help the prospects for a successful combination.

"You've got to manage the culture of two enemies that have hated each other for decades," he said.

But Van Conway, the president of the turnaround firm Conway, McKenzie and Dunleavy, said he wasn't ruling out the possibility that a merger could help GM.

The new, combined company, he said, could save a substantial amount of money by eliminating overlapping positions.

"That's why two losing companies typically merge, not because of revenue. They merge because of the reduction in overhead costs," Conway said.

In determining whether a merger would work, he said, the automakers would have to weigh those savings against other costs, including severance for laid-off employees. The companies, he said, might also not want to deal with the diversion the merger would cause for top management at an already challenging time.