Battered by Industry Slump, GM and Chrysler Hold Merger Talks

General Motors and Chrysler, bruised by the severe industry downturn, have held preliminary discussions about combining operations, including a full-scale merger, according to people familiar with the talks. It was unclear over the weekend whether the discussions were progressing and what, if anything, would result.

Spokesmen at GM and Cerberus Capital Management, the private-equity group that owns Chrysler, declined to comment. In a statement, Chrysler said "the company is looking at a number of potential global partnerships as it explores growth opportunities around the world" but added there was no further announcement to make.

An official at one of the companies with knowledge of the discussions said the situation appears to be "fluid" as Cerberus pursues other potential buyers for Chrysler. The officials familiar with the talks spoke on the condition of anonymity because they weren't authorized to be quoted about the discussions.

Both GM and Chrysler have been hit hard by the global credit crisis and by a pullback in consumer spending. People are having more difficulty getting auto loans. GM's U.S. sales have dropped 17 percent this year, while Chrysler's have slumped 25 percent.

GM's share price this week plunged to its lowest level since 1950 on fears that it would not weather the downturn.

Detroit's automakers, including Ford, have been dogged by bankruptcy rumors all year. J.D. Power and Associates said last week that the global auto industry might experience an "outright collapse" in 2009. The New York Times reported yesterday that GM also held merger talks in July with Ford that ended with Ford rebuffing GM. Ford officials couldn't be reached for comment last night.

The dash for industry pairings and the possibility that a dramatic step would sweep aside Chrysler, an 83-year-old American icon, shows how weak economic conditions could reorder the automotive landscape, analysts say.

A GM-Chrysler merger could also affect the future of GMAC Financial Services, the giant housing and auto financing division that GM partly spun off to Cerberus in 2006. Like other financial institutions, GMAC has been confronted with enormous difficulty in tapping the capital markets as other lending institutions pull back. That difficulty in turn restricts GMAC's ability to lend money to automotive dealers, car buyers and homeowners. Cerberus owns 51 percent of GMAC.

Chrysler, the smallest of Detroit's Big Three, has changed hands twice in the past decade. In 1998, the company shifted from a stand-alone U.S. public company by pairing up with Germany's Daimler-Benz. In 2007, Cerberus purchased an 81 percent stake in Chrysler, becoming the latest owner.

Last month, Cerberus and Daimler confirmed that talks were under way for Daimler to sell its remaining stake in Chrysler to Cerberus. David Healy, analyst with Burnham Securities, said the sale would give Cerberus the flexibility to pursue new joint venture deals.

Healy said big automotive mergers usually don't work out.

"A lot of money could be saved on joint ventures -- new powertrains, new models, alternative fuel vehicles, hybrids," Healy said. "Whether you need a full merger to accomplish that, I'm a little skeptical."

For Chrysler's workers, a new owner could open a painful new chapter. Fear already runs deep given the company's turbulent history, including brushes with financial disaster in the late 1970s and takeover battles with billionaire investor Kirk Kerkorian in the 1990s.

Last year, during contract negotiations with the United Auto Workers, union workers at Chrysler struck the automaker for six hours. At one point, police briefly sealed off highway ramps near the company's Auburn Hills, Mich., headquarters as angry workers filled the streets.

The current downturn is worsening the jobs trend in the U.S. auto industry. Over the past eight years, Michigan has lost 47 percent of its vehicle manufacturing jobs and 27 percent of other manufacturing jobs, according to a government analysis. Nationally, the losses have been about 21 percent in each category.