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GM, Chrysler Seeing Marriage Brokers


Possible merger for ailing automakers.

General Motors (GM) may merge with Chrysler in a deal that would give GM control and leave Chrysler's owner, Cerberus Capital Management, with a less than 10% stake in the new company.

The deal would give the combined company about a third of the US vehicle market by sales, but its success would depend on the willingness of the next president to back billions of dollars in aid, and to move quickly.The proposed merger would require support from GM's board, which has so far withheld judgment, Reuters reports.

The merger would result in deep cuts in production costs; some well-known nameplates would almost certainly disappear. Production would be shifted to fuel-efficient cars and away from SUVs and pickup trucks.

A successful merger would change the shape of the US auto industry, and could save both companies. However, the deal might leave Ford (F) as the auto industry's odd man out.

GM's acquisition of Chrysler would probably eliminate half of Chrysler's 66,000-person workforce, and would probably halt Chrysler's production of engines, transmissions and power-train components. The unions might decide it makes sense to save some jobs, rather than lose everything if one or both companies fail.

GM has been unable to find an outside investor to back its acquisition of Chrysler. Chrysler's creditors have been reluctant to restructure a $7 billion back loan due 2013. To complete the deal, Uncle Sam may become the lender or investor of last resort.

Cerberus would retain a stake in the new company in an effort to align the interests of GMAC with the automaker and dealers. Cerberus bought a 51% stake in GMAC in 2006 from GM; under Cerberus, GMAC restricted loans to the most credit-worthy borrowers and cost GM sales in a slumping market. Cerberus acquired an 80.1% stake in Chrysler in 2007 in a deal with Daimler AG.

GMAC said tightening credit markets required the new standards, but some see it as a tactic to get GM to the bargaining table.

Both presidential candidates, Democrat Barack Obama and Republican John McCain, have backed support for the automakers.

Reportedly, Morgan Stanley (MS) and Evercore Partners (EVR) represent General Motors. JPMorgan Chase (JPM) and Citigroup (C) are advising Chrysler and Cerberus.
No positions in stocks mentioned.
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