Chrysler shops for options

New reports say the carmaker has had talks with several international automakers.

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By Peter Valdes-Dapena, CNNMoney.com senior writer

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Chrysler's vehicle line-up is heavy on trucks and SUVs like this Chryler Aspen, shown here coming off a Newark, Del., production line.
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NEW YORK (CNNMoney.com) -- As speculation flies about a possible link-up or sale of Chrysler, analysts are wondering which makes more sense: an all-American marriage or a foreign suitor.

On Tuesday, a report from the Detroit News said Chrysler had been talking to foreign automakers about taking over the company. Last week, other reports said it was talking to General Motors (GM, Fortune 500) about a similar deal.

Other talks had stalled in the past, but hard times across the auto industry may make potential partners more receptive.

Negotiations with potential partners for Chrysler began less than a year after private-equity firm Cerberus acquired the automaker in the Summer of 2007, according to the Detroit News. Any progress, however, has been stifled by the global credit market crisis, according to various reports.

But it's the credit crunch that has hit sales for Chrysler and other automakers. "The snowballs are coming down the hill faster and faster," said Van Conway, president of Conway MacKenzie and Dunleavy, a Detroit-based turnaround and merger consulting firm.

Overall auto sales are expected to be 16% lower this year than last. Sales are expected to fall another 11% next year, according to market analysts at J.D. Power and Associates, as worried consumers continue to put off car purchases.

That kind of pressure threatens to kill off at least one of the major Detroit carmakers, Jim Hossack of the automotive consulting firm AutoPacific predicted, and with the steepest sales drops, Chrysler seems to be the weakest of the three.

Rather than going out of business though, Chrysler would more likely be absorbed into another company in some way, according to Hossack. "Generally speaking, car companies don't disappear, they take another form," he said.

Domestic play

For its part, Cerberus may still not want to sell Chrysler, at least not altogether.

"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," said one source familiar with Cerberus's business strategy.

While not directly acknowledging merger talks, Chrysler chief executive Bob Nardelli told employees in a letter released Monday that the company had been "approached by third parties who are interested in exploring future possibilities with Chrysler."

Chrysler spokesman David Elshoff also would not confirm discussions beyond those involving automotive component and parts sharing.

Merger talks with GM would be natural in an environment in which both companies are getting hit hard, said Conway.

"I think when two business are losing money in the same market down the road from each other, evaluating a merger should always be done," he said. "Maybe you do it for five minutes, maybe you do it for five months."

A key factor in any merger or alliance transaction, said Conway, has to be cash. Especially for a domestic automaker, there has to be enough money in the deal to make up for the cost and distraction of integrating the two businesses.

Combining Chrysler and GM would allow both companies to reduce redundant vehicle brands and operations, said Hossack, while giving them more leverage with labor unions and the federal government.

But a merger between giant U.S. carmakers wouldn't make much sense, said Michael Robinet of Detroit consulting firm CSM Automotive. He argued that the confusion of consolidation would distract the company from taking basic steps to survive the current crisis.

GM and Ford are already moving to consolidate vehicle engineering in their various global markets and to switch toward smaller vehicles, he said. Those moves will take years to pay off, but a massive merger would only make managing the company more difficult and unpredictable.

Hands across the water

Chrysler already has a number of production deals with Nissan. Chrysler and Cerberus officials traveled to Japan in February for talks that went beyond mere product sharing, though, according to the Detroit News.

Chrysler has been in on-going discussions with Nissan about possible areas in which those companies could work together beyond a current product limited-sharing arrangement, said Elshoff. But "None have been found, none have been announced," he said.

Nissan already has an alliance with Renault of France. While not merged, the two companies own stock in one another and share some vehicle engineering and the same chief executive. CEO Carlos Ghosn has reportedly been seeking to add an American partner to that alliance, and had previously held discussions with GM.

Building on that relationship would make sense for Chrysler, said Conway, because the resulting company would not compete with itself in various global markets and vehicle segments.

In addition to Nissan, Chrysler has also talked to Fiat (FIAT.Y) of Italy and Tata Motors (TTM) of India, according to the Detroit News.

Of course, a partner may not want all of Chrysler, either, pointed automotive analyst Todd Turner of Car Concepts.

A Chinese company, for instance, may want Chrysler's distribution and sales network. But, with Chinese labor far cheaper than American, it would have no use for Chrysler's factories.

Those could be sold off to some other company, most likely one not involved in building cars.

"Chrysler's plants are all union and they're all in hot union properties," said Turner, meaning states like Michigan and Ohio where union power is strong. That makes their labor particular expensive. A company that makes something else entirely, like PCs or DVD players, might better be able to use those factories at a competitive wage rate.

Chrysler's been down the merger road before, of course. The biggest lesson to be learned there is "Be careful who you have a friendly partnership with," said Turner.

What was originally posited as a merger of equals turned out to be a takeover, he said, and one that ultimately left Chrysler weakened and alone. To top of page

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