General Motors Corp. has been in talks for two months with DaimlerChrysler AG about acquiring all of the troubled Chrysler Group and folding its operations into GM, according to people familiar with the discussions.
The first contact occurred in December, when GM Chairman Rick Wagoner and DaimlerChrysler Chief Executive Dieter Zetsche met in Detroit to discuss the blockbuster idea of GM buying Chrysler from its German parent company.
While a deal is far from certain, at least four meetings have taken place involving Wagoner and GM's chief financial officer, Fritz Henderson, and Zetsche and DaimlerChrysler's CFO Bodo Uebber. Talks are said to be ongoing, primarily between Henderson and Uebber.
Both companies declined comment Sunday.
The underlying rationale for the deal is the need for major consolidation in the intensely competitive American auto industry, said people with knowledge of the talks.
GM, the No. 1 U.S. automaker, is said to be interested in absorbing Chrysler's revenue, production volume and brands, while cutting duplicative labor costs, management and overhead.
DaimlerChrysler, for its part, is intent on dissolving the 1998 merger that brought together the former Daimler-Benz AG and Chrysler Corp.
A GM acquisition of Chrysler would essentially reduce the Big Three to a Big Two, with only GM and Ford Motor Co. surviving from the dozens of American automakers that once existed in the 20th century.
As the deal has so far been discussed, Chrysler would cease to exist as a company or a corporate subsidiary. Instead its factories, brands and products would become part of GM's organizational structure.
But industry experts say such a deal would be fraught with risk for GM, which is in the midst of its own turnaround.
"They're not far along enough, in my assessment, to take on something as gigantic as absorbing Chrysler," said Gerald Meyers, a business professor at the University of Michigan and former chairman of the AMC automaker acquired in 1987 by Chrysler.
Wall Street analysts also have been skeptical about whether this would be a good deal for GM, ever since last Wednesday when the talks were first reported in Germany's Manager magazine.
"GM already has too many brands that cannibalize each other," said analyst Brad Rubin at investment firm BNP-Paribas. "If you add three more, there's going to be more cannibalization."
The talks, according to one source, could take months to complete. Also, other bidders are likely to emerge for Chrysler, which lost $1.5 billion in 2006 on revenues of $62 billion.
But there is growing momentum in the discussions between GM and DaimlerChrysler.
At DaimlerChrysler, the negotiations are being handled in great secrecy, at the highest levels. Company insiders say the management concluded that it needed to sell Chrysler during the annual 10-year strategic review of its operations, which took place in the fall.
DaimlerChrysler sources said it would be beneficial to sell the Auburn Hills unit as a whole rather than in parts because of the health care liabilities, which are estimated at $18 billion. Without liabilities, Banc of America Securities puts Chrysler's value at $5 billion.
There are two crucial issues that could prevent a GM purchase from happening: what price GM would pay for Chrysler and how the United Auto Workers union will react to two of the Big Three automakers joining together.
After losing $10.6 billion in 2005, GM is in the midst of a historic turnaround that includes slashing more than 30,000 jobs and closing several U.S. plants.
Chrysler last week announced its own broad restructuring that will eliminate 13,000 jobs and downsize vehicle production to match its shrinking market share.
A combination of the two would lead to deeper cuts, according to Meyers. "If you think the layoffs you've seen today are large, well, it's going to be a bloodbath in Detroit and in the Midwest."
He said the Chrysler assets that would be most valuable to GM were the Jeep brand, which could be paired with the Hummer nameplate, and its minivans.
"You could make the case that it's a good defensive move (for GM)," Meyers said. "But it's a huge risk. There's a lot more to be lost than to be gained."
On Wednesday, Zetsche stunned the automotive world when he said that "all options are on the table" regarding Chrysler, including alliances with other automakers or a possible sale.
In fact, Zetsche had begun discussing the plan of selling off Chrysler with Wagoner in December, according to people with knowledge of the meeting.
The talks were said to be of a serious nature from the start.
Zetsche was coming under heavy pressure from German shareholders to dump Chrysler, which has ridden a roller-coaster cycle of profits and losses since it was acquired nine years ago.
The initial meeting with Wagoner established that GM was interested in a Chrysler deal.
While GM had hit bottom with its own losses and painful restructuring, Wagoner and his management team had growing confidence that its turnaround plans were on track.
Buying Chrysler would boost its volumes and revenues significantly, and ensure that GM remained ahead of Toyota Motor Corp. as the world's biggest automaker. In the process, Chrysler's management structure would be eliminated and much of its staff functions taken over by GM.
GM would add the Chrysler, Dodge and Jeep brands to its corporate lineup, and save money by spreading engineering and vehicle development costs over a larger and broader range of products.
Together, GM and Chrysler accounted for 11.8 million vehicles sold in 2006. Their combined U.S. market share would exceed 35 percent. And their status as American icons would make a combination of the two a historic event in the history of the U.S. auto industry.
GM's board of directors was said to be supportive of the discussions continuing. DaimlerChrysler's supervisory board has already publicly endorsed exploring "far-reaching strategic options" for Chrysler.
The wild card in any deal, however, will be the UAW. Bringing Chrysler into GM's organizational structure would likely require union cooperation on health care costs and staffing levels.
