Would a Chrysler deal help General Motors?

By Elizabeth Strott

As news goes, this was a blockbuster.

General Motors (GM, news, msgs) was in talks to buy all of DaimlerChrysler's (DCX, news, msgs) Chrysler Group, trade publication Automotive News said Friday.

The trade paper said that talks between the companies about an alliance to design a new sport-utility vehicle have moved on to discussions about an outright sale of Chrysler Group. What's more, Reuters confirmed the story.

Investors loved the idea -- for Daimler which would get rid of a costly and troubled subsidiary. Daimler shares shot up 4.4% to $73.33 in New York on the news. The news ultimately had little effect on GM shares. Down a bit more than 2% after the news first broke, the stock finally ended the day with a small loss at $36.34 as the stock market overall was basically unchanged for the day.

Reporters and editors loved the story. It involved big auto makers and lots of money.

But will a deal really happen? Most experts and analysts dismissed the idea. It's too big and too complex, they said, and may not make sense.

GM's top union official in Europe said it would be a "disaster" for the company if it bought Chrysler, Automotive News said. "The problem is that Chrysler is in the same situation as GM. They don't have the right product portfolio," Klaus Franz told the publication. "This would be comparable to GM's alliance with Fiat. And GM lost a lot of money with that decision."

Neither DaimlerChrysler nor GM would comment.

Wary of Nissan-Renault?

Why might GM want to do a deal? John Novak, an analyst with Morningstar Investment Service, told Bloomberg News that "a nightmare scenario for them would be Nissan-Renault, with their global footprint, getting control of Chrysler."

"There are things about a deal between the two companies that make sense to me," veteran auto watcher Maryann Keller said on Friday. "They are located in Detroit. They could share products easily. Chrysler would use GM product development and engineering, and there would be lots of synergies in purchasing, finance, etc."

And, she added, "It would make GM the biggest auto company in the world again, something that I think they would like."

Japanese auto giant Toyota (TM, news, msgs) is widely expected to become the world's largest auto maker sometime this year.

She also doesn't see GM buying Chrysler to put it out of its misery. "No one buys a company to shut it down. In the case of auto companies, that is especially important since there would be massive liabilities to dealers which GM knows all about after it shut down Oldsmobile."

A merger that hasn't worked

Chrysler has struggled to shine in the near-decade that Chrysler has come under the DaimlerChrysler umbrella. CEO Dieter Zetsche, who led the merger between the two companies in 1998, when he was chief of Chrysler Group, has been under pressure to justify the merger. Zetsche assumed control of the merged company in 2006.

• Video: Deal or no deal?

Pete Brown, Automotive News' editorial director, told CNBC that GM routinely has discussions with other auto makers. He said German investors are pressuring Zetsche to get rid of the "American stinker."

Zetsche said Wednesday that under its restructuring plan, all options for the company's future were on the table.

But despite the growing number of DaimlerChrysler shareholders who want like to see the Chrysler unit go, selling it is easier said than done, Bankhaus Salomon Oppenheim analyst Michael Raab told Automotive News. He said it could cost perhaps $34 billion to separate the businesses.

Earlier this week, DaimlerChrysler reported a 40% plunge in profit in the fourth quarter of 2006, mostly due to large losses at Chrysler.

It's not going to happen

Most analysts dismissed the idea that a GM-Chrysler deal would happen.

Auto analyst Jim Hall at AutoPacific told CNBC that if GM took on the valuable Chrysler brand, the burden for legacy costs would increase 30% from the $5 billion GM already puts aside every year to cover such expenses.

And John Casesa, an analyst at Casesa Strategic Advisors, said he's not convinced a deal would happen. "This would be at least a $5 billion-plus deal and GM is not that liquid right now," he told CNNMoney.com.

CNBC's Phil LeBeau said speculation about the talks may be surpassing their substance. GM has been focused on expanding in lower-cost markets outside the United States, LeBeau said, and it may want to keep its focus there. If GM took on more capacity in North America by acquiring Chrysler, there would be enormous product and dealership overlap, as well as more liabilities.

David Healy, a Burnham Securities analyst, agreed. "Both companies have a full plate of issues they are trying to solve," he told Bloomberg News. "I see no synergies at the corporate level."

The only plus to such a deal, LeBeau said, would be the size advantage that a joint company would have.

What's next for Chrysler?

Chrysler needs to pay more attention to smaller vehicles and hybrids, Dutch Mandel, Autoweek Magazine's editor, told CNBC Friday.

LeBeau speculated that Nissan-Renault could buy Chrysler, noting that CEO Carlos Ghosn has expressed interest in such a move in the past. LeBeau also said Toyota could buy parts of the company, though Toyota said earlier this week that it was not interested in acquiring Chrysler Group assets.

On Thursday, Chrysler Group CEO Tom LaSorda said Chrysler would tap into other alliances to save costs on expanding outside the United States. LaSorda did not comment on specific alliances. DaimlerChrysler also said Friday that doors at eight more plants will be shut, in addition to the three announced Wednesday as part of a restructuring plan.

The latest plants to close make components that go into pickups, sport-utility vehicles and other bigger vehicles, none of which have been selling well for Chrysler.

Market Dispatches columnist Charley Blaine contributed to this report.