GM, Chrysler Talk Merger: GMAC central to negotiations

Talks continued over the weekend between General Motors and Chrysler about a potential merger of the two U.S. automakers.

Sources suggest that Cerberus Capital Management - the private-equity firm with an 80.1-percent stake in Chrysler Corp. - approached GM about a month ago. These negotiations were kept secret until Friday. Earlier this year, GM approached Ford about a merger, but those discussions broke off mid-summer.

GMAC is a central piece of puzzle. Two years ago, Cerberus paid GM $14 billion for 51 percent of the auto loan giant that also has significant positions in real estate, banking and insurance. As such the GM subsidiary has taken a battering from the sub-prime meltdown right along with the rest of the financial industry.

Nonetheless, Cerberus looks at the financial sector's travails as an opportunity with values severely depressed and significant bailout funds in the pipeline. As such, the private-equity company has offered to swap Chrysler's automotive operations for the remaining 49 percent of GMAC.

Industry analysts are skeptical that a deal will be struck. However, the very fact that GM is examining the merger option is a reflection of the timorous state of the automotive industry. Both GM and Chrysler are at the center of bankruptcy speculation and are hustling to cut costs to conserve that rarest of commodities - cash.

The reality is that GM is further along than Chrysler toward producing the fuel-efficient, environmentally friendly vehicles the public is currently favoring. Deal or no deal, both companies are looking at significant cut-backs over the next 12 months.