General Motors Corp. and Chrysler LLC have reopened merger talks, as Chrysler owner Cerberus Capital Management LP has signaled its willingness to give away part of its ownership in the auto maker, say people familiar with the discussions.
With cash running low at both companies, Cerberus took the initiative to restart discussions that sputtered just weeks ago. At that time, both GM and Chrysler viewed a business combination as impractical and as a distraction from their mounting liquidity problems.
The renewal of the talks could be a way for Cerberus to show Washington -- which is weighing a $14 billion rescue package for the auto industry -- that it wants to cooperate in restructuring the industry, say people familiar with the buyout firm's thinking. And it could offer the firm a way to protect its stakes in two distressed auto-finance companies, GMAC LLC and Chrysler Financial, which are crucial to the survival of the Detroit auto makers.
It isn't clear what effect the renewed merger talks might have on the intricate political calculus hanging over a government rescue of the auto makers. Wednesday, Chrysler said it would suspend production at all 30 of its plants for a month starting Friday.
Earlier this month, Congress pressed Cerberus to inject fresh capital into Chrysler as part of any rescue plan. So far, the firm has rejected the idea, saying shareholders of rivals GM and Ford Motor Co. aren't being asked to contribute more capital, and that its investment charter prohibits such a move.
One way in which Cerberus might make concessions, however, could be to give away some of its principals' stakes in Chrysler as part of a broader restructuring. That could mean giving a future government auto czar discretion to distribute Cerberus' stake to the United Auto Workers union or even to GM.
Cerberus's equity in Chrysler has already been valued at zero by Daimler AG, which still owns 19.9% of the auto maker. But Cerberus hopes lawmakers would view such a move as a contribution to the restructuring of the troubled industry, says a person familiar with its thinking.
Chrysler is asking the government for a $7 billion bridge loan by Dec. 31. The company told lawmakers earlier this month that the financing required for even a short bankruptcy would be higher -- between $12 billion and $15 billion for a proceeding lasting just one year. But its argument got a harsh reception from many lawmakers, who questioned why Cerberus couldn't provide the financing.
For now, the Bush administration isn't planning to force GM or Chrysler into bankruptcy as a condition for receiving government aid, an option that had been on the table previously, say people familiar with the matter. The administration is still wrestling with how much money to give the auto makers and how long the aid should last, according to one of these people.
Layered on top of these complex discussions is the fate of GM's former finance unit, GMAC, in which Cerberus holds a majority stake. It also controls Chrysler's Chrysler Financial unit. Part of Cerberus's strategy, say people briefed on the matter, is to protect its majority investments in these two units.
A person familiar with the GM-Chrysler talks said that Cerberus is eager to make concessions in order to arrange a combination of Chrysler's finance arm with that of GM. "That is one of the core goals," this person said. In order to achieve that end, according to this person, Cerberus feels it has to be flexible on the use of its ownership stake in Chrysler.
Chrysler's financing arm warned auto dealers earlier this week it may have to temporarily stop making the loans they use to stock their lots with vehicles. Dealers, concerned Chrysler could seek bankruptcy-court protection, have been withdrawing as much as $60 million a day -- about $1.5 billion so far -- from the fund used to help them finance their inventory, according to a letter reviewed by The Wall Street Journal.
The financing units haven't played a big role in the jockeying over an auto-industry rescue. But federal officials are looking at whether any money put toward rescuing the auto companies might go for naught if the government couldn't also save the companies' financing arms, said one person briefed on the talks. "The fincos were ignored in the congressional debate, but they have requests out as well for money," and now they and the auto makers are being considered as a package, this person said.
Chrysler Financial and GMAC are constrained by the tight credit markets. Because they could be classified as banks, they are central to Detroit's argument for receiving government money from the Troubled Asset Relief Program, set up for the financial industry.
One developing problem in the auto makers' pursuit of government rescue funds is the state of Chrysler's collateral. Unlike GM, which has assets it can pledge or use as collateral for a federal loan, Cerberus is believed to have pledged all of Chrysler's assets in the summer of 2007 as security for $10 billion in bank debt.
GM, by contrast, could pledge its substantial operations in Europe, China and elsewhere, along with trademarks. An analysis by J.P. Morgan Chase & Co. this summer estimated those assets could raise $6 billion to $9 billion for the company. That could make the government feel more secure in lending money to the auto maker.