First, I want to point out that most mergers in history are not successful.  Second, I would like to point out that most mergers happen between a company that is doing well and a company that is doing poorly or between a company that is doing well and a company that is doing ok.  I can’t recall any merger, especially a successful one that happened between two companies that are bleeding money.

Second, the talks surrounding the merger are not yielding much information, though various news outlets have quoted sources.  So most of what we think we know is speculation of some kind.  With that in mind I would like to add my speculation to the mix.

From most of the reports coming out of Chrysler (and I watch the company closely) it would seem that Chrysler is well on it’s way to becoming profitable all on its own.  Every time Nardelli or Press talked about Chrysler they said that they were meeting and exceeding their goals for becoming profitable.  Then the credit market seized up and a lot of things went out the window.

I believe that the guys at Cerberus think they know how to make any company profitable, and that includes automakers.  They took a look at GM and saw that GM was bleeding money fast and is in a tough position.  This makes them an easy target.  And why not?  Cerberus already owns one american automaker, combine the two and make them profitable and now you have a much bigger piece of the pie.

From there Cerberus must have done a study to find out what brands in a proposed company would be the most valuable.  They find out that the Chrysler brand itself is one of the brands that needs to go, so they can’t position the merger as Chrysler buying out GM.  It would look silly to have Chrysler buy GM and then shut down the brand that the company is named for.  So it needs to be positioned as GM buying out Chrysler.

This also helps out Cerberus by making GM the bad guys.  The only way to make the combined company work is to cut all redundant staff.  If it’s GM doing the buying and the cutting Cerberus comes out of this a lot cleaner than if Chrysler buys out GM and kills the staff.

There are reports that Cerberus (from the company itself) wants to have a stake in the combined automaker.  This would seem to support the idea that they want to combine the automaker and have a bigger piece of the pie.  Since Cerberus would probably be the biggest stock holder in the company they would get to cherry pick the board members that they want.  There are conflicting reports on this, Cerberus denies that they would can any of the GM board members, but most of the GM board seems pretty cool to the idea of a merger.  Why wouldn’t they if their jobs are gone after the merger?

Overall I see this as Cerberus seeing an opportunity to own a large portion of the biggest automaker in the world.  They think they can reduce costs by cutting redundant workers and improve the image and quality of their cars.  I think they’re biting off more than they can chew.

Renault-Nissan has a presence in the US market through Nissan, but it’s a small one.  The company has been looking for a partner in the US for some time now, they’ve proposed alliances with GM in the past.  Now, at a time when Cerberus seems like it wants to get out of the car business and has been pushing for a GM/Chrysler buyout/merger Renault-Nissan is proposing to buy 20% of Chrysler.

The two companies are already partnering on vehicles.  Nissan will make a small car for Chrysler and in return Chrysler makes the Nissan Titan and provides Nissan with Heavy Duty trucks as well.

It’s believed that Cerberus would prefer a GM/Chrysler buyout, but so far that deal seems to be halted without any avenue to get financing for the deal.  GM would need to raise a lot of cash to buyout Chrysler workers, and they can’t find a bank willing to lend it to them.

Carlos Ghosn, CEO of both Renault and Nissan has publicly denied any kind of merger as recently as July, but things have changed a lot since then.  He also states that he’s against buying up companies.

“I think that when people talk about consolidation, they imagine company A buying company B. We know this does not work,” Ghosn said at a grand opening celebration of the company’s new North American headquarters in Nashville, Tenn. “Company A buying company B is guaranteed destruction of value after a while.”

And so far he’s practiced what he preached.  Renault owns a 44% stake in Nissan and Nissan owns a 15% stake in Renault.  With both companies sharing many parts under the hood to reduce costs but otherwise remain autonomous of each other.  The only link other than the parts sharing is Ghosn himself, as he’s the CEO of both companies.

Source: Detroit Free Press

While I would prefer Chrysler remain independent I would also concede that Renault is wildly preferable as a buyer of Chrysler than GM.  Renault would keep Chrysler intact while GM would burn it to the ground keeping only bits and pieces.

According to a Wall Street Journal report, talks between General Motors and Cerberus/Chrysler are “floundering” as GM is having a tough time finding investors who would be willing to finance any deal between the two US automakers.

General Motors and Chrysler have been suggesting a plan that would save $10 billion while at the same time 40,000 jobs at a combined company.  Backers of the deal between the two car companies think that the combined company would produce $250 billion in annual revenues, with sales around 30% of the US market.

Of course there’s also the $10+ billion in cash that Chrysler holds and the combined company would hold about $30 billion in cash, improving GM’s credit rating and helping the company get through the next couple years of being in the red.

While the plan seems like a no brainer at first glance, many potential investors are having trouble accepting that a deal would do anything for either GM or Chrysler.  The WSJ puts it, lenders remain fearful of the complexity and scale required to combine two massive industrial companies given extreme uncertain in the credit markets. The article points out that if investors continue to be wary of the deal, executives may need to bring the plan in front of the US government, hoping for a possible intervention.

Sources say they are unsure of what role the government would take in the event of a deal, but believe that a government stake in the combined automaker would be “very important”.

With all the rumors flying around about the chrysler sale and or merger many journalists have posited that Renault-Nissan is one of the potential buyers.  It makes sense, afterall, Nissan and Chrysler have a close relationship right now.  Starting in 2010 Chrysler will build the Nissan Titan and Nissan will build a small car for Chrysler.  For that deal to take place Nissan would’ve wanted to look at the books pretty closely to make sure that Chrysler wasn’t going out of business.

With all that knowledge journalists are saying that Renault might buy up Chrysler like it did Nissan and just run the company independently.  Afterall, Renault doesn’t have a strong presence in the US and they have been clamoring for one for years now.  The addition of Chrysler would also make Renault a powerhouse spanning three continents.  Another more recent possibility is that Renault buys the Jeep brand from Cerberus and GM gets the rest.

But now we are getting reports that Renault isn’t in the running for Chrysler nor it’s Jeep brand.

“There are no discussions. We are focusing on dealing with the current market situation,” Renault spokeswoman Frederique Le Greves said. A spokesman for Nissan declined comment on any talks with the Japanese automaker which is 44-percent-owned by Renault.

So it would seem that with Renault out the only other possible buyer is GM.  And with GM buying Chrysler you can bet things would change.

While there are many sites and journals and blogs out there reporting that GM and Chrysler are just a hair away from merging one is reporting of the financial roadblocks to such a merger.  As it stands right now Cerberus has stated that they want to retain a major stake in any combined company, it’s unclear how any kind of merger would deal with the 19.9% of Chrysler that Daimler still owns.

JPMorgan owns a lot of the debt that Cerberus took on to get Chrysler.  They have been pushing for a merger and likely would put some financial backing to it, but the amount of money needed to get something like this done is beyond what JPMorgan would or could handle.  Right now the financial markets are not favorable to any type of transaction of this magnitude happening.

Rick Wagoner, the CEO of GM seems to be desperate to have a merger take place (his legacy right now isn’t all that great and the merger might shine a little bit of light on it).  But the board members at GM are reluctant to merge GM with Chrysler.

When Chrysler reveiled their three ENVI vehicles a few weeks ago we found that one of them was an all electric sports car for Dodge.  Likely a replacement for the Viper (Chrysler is looking to sell the Viper name for some cash, the new CAFE standards preclude Chrysler from making the Viper in a few years).  The Dodge EV with it’s batteries would have a range of over 150 miles, but that’s not very practical for every day buyers.  Then again, a Viper isn’t that practical either.

The other two EVs are extended range electric vehicles (that’s GMs term for it).  They use batteries for the first 40 miles to power an electric motor that drives the wheels and then a gas engine switches on to extend the range.  The Chevy Volt does the exact same with it’s engine and motor.  The question has been, does the gas engine bypass the batteries like the Volt does, or does it run a generator that recharges the batteries so that the batteries will always power the electric motor.

“The gas engine recharges the battery a little bit,” said Cole Quinnell, a Chrysler spokesman. “But that’s just excess and overflow, not the central intent. It’s more efficient for the gas motor to drive the wheels, not recharge the batteries. The cost to recharge the battery by running the generator is eight times the cost of taking it home and plugging it in.”

Along with the actual dollar cost of using gas to recharge the batteries the longevity of the battery pack is a consideration for this decision.  Rechargeable batteries have a lifespan of only so many charges.  Having the gas engine constantly recharge the battery pack would shorten the life of the batteries significantly.

Reuters is reporting that Cerberus Capitol Management is not looking to sell it’s stake in Chrysler.  Rather it would like to buy up a portion (or all) of whomever they make their deal with to combine the two automakers.

“Cerberus executives have maintained repeatedly that they believe in the industry. They expect to be there for the long term and want to do all they can to position Chrysler for the future,” a source said.

Chrysler has seen sales slide 25% this year alone, a higher percentage than the auto industry as a whole.  It remains a hot topic for automotive reporters to speculate on.  No one quite knows what the future of Chrysler is and with the company being silent to the press it’s an easy target to fill a column with.

Cerberus recently had talks with General Motors about a potential merger.  But according to a source the talks never consisted of giving up any of their stake in Chrysler.  Nor would they swap it for GMs stake in GMAC.

“Cerberus is not dumping Chrysler or simply swapping it for an increased share in GMAC. That deal was not discussed and they have no interest in it,” said the source, who declined to be identified.

“In any business combination with GM or anyone else Cerberus would look to come out on the other side owning a meaningful stake in the combined auto company,” the source said.

I guess with the auto industry in shambles it makes sense for the guys with all the cash to come in and scoop up some of the mess for pennies on the dollar.  The upside would be too hard to ignore.

There’s an article printed late today in the NYTimes that talks about GM possibly buying up Chrysler.  I find this to be an unlikely event, given the current state of the auto industry.  No automaker has any cash to buy up another one.  From the article:

General Motors is in preliminary talks about a possible merger with Chrysler, a deal that could drastically remake the landscape of the auto industry by reducing the Big Three of Detroit automakers to the Big Two.

The talks between G.M. and Cerberus Capital Management, the private equity firm that owns Chrysler, began more than a month ago, and the negotiations are not certain to produce a deal. Two people close to the process said the chances of a merger were “50-50” as of Friday and would most likely still take weeks to work out.

GM would have over 10 viable car lines then and without Chrysler many of them overlap.  With Chrysler and you now add another 3 that compete with one another.  Dodge with Chevy, Jeep with Hummer, Chrysler with Buick.  Toyota succeeded because they only have 3 car lines and focus on just making those the best they can be.  More is less in this case, and GM is already trying to sell of different lines - the last thing they need to do right now is add three more.

UPDATE:

Chrysler has officially responded to the merger talks by saying they won’t comment.  I guess we now know why Cerberus is keen to buy the remaining 19.9% of Chrysler from Daimler.  I still don’t see it being sold to GM, GM isn’t financially healthy enough to spend that much money.  And they won’t enjoy any economies of scale or shared platforms for half a decade, by which time they’ll probably be healthy on their own.

Chrysler was very secretive about making their electric cars.  It started with a mandate in July of 2007 to make working prototypes by summer of 2009.  Chrysler took different people from all over the company and put them in their own skunkworks like group and were told to just get it done.  They have an unknown budget which probably means that it’s big.  No one knows much about it or how far along they are with their vehicles.

“We were completely shocked here,” when Chrysler announced the vehicles on Sept. 23, said Tracy Handler, an automotive product analyst at Global Insight Inc. in Troy, Michigan. “And probably skeptical a little bit as to how real these are.”

Until the announcement a few weeks ago, that Chrysler would have an electric vehicle for sale in 2010, Chrysler didn’t figure into the fuel efficient market and it certainly didn’t figure into the electric car market.

“It’s going to be tough for them to pull this off,” said Mike Omotoso, a Troy, Michigan-based analyst at market-research firm J.D. Power & Associates. “It’s unlikely that Chrysler will have the resources or technology to develop production vehicles by its 2010 goal,” he said.

So far the major competition in the electric car market is the Volt, made by GM.  Nissan has announced that it wants to have a 100 mile range electric vehicle soon, but haven’t announced a date.  Likewise, Toyota hasn’t set a date for their plugin Prius either.

Chrysler talks about it’s electric vehicles some more.  They estimate that by 2020 at least half of the market will be made up of vehicles that utilize batteries to get better mileage in one way or another.  It could be simply shutting the engine off at stops all the way up to fully battery powered vehicles.

“You’re going to see the electrification of all vehicles” in the years ahead, said Frank Klegon, Chrysler’s executive vice president - product development.

The current Dodge EV is Chrysler’s first attempt to build an all electric vehicle (and is likely going to be their first EV in production).  It’s built on a Lotus Europa platform, and would outperform the Lotus on the track.  It goes 0-60 in less than 5 seconds with a top speed of 120 mph.

Though he’s tight lipped about which one will come first, CEO Bob Nardelli promises that by mid decade Chrysler will have a fleet of electric vehicles.