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GM, Chrysler in Talks on Design Alliance, People Say (Update3)

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GM, Chrysler in Talks on Design Alliance, People Say (Update3)

By Jeff Green and Jeff Bennett

Feb. 15 (Bloomberg) -- General Motors Corp., the world's largest automaker, is in discussions with DaimlerChrysler AG's Chrysler unit on an alliance to share the costs of designing and developing cars, people with knowledge of the talks said.

The discussions, which began about a month ago, may allow the two automakers to share chassis designs and reduce development costs, said the people, who asked not to be identified because the talks are private.

DaimlerChrysler, of Stuttgart, Germany, said yesterday it is considering ``all options'' for the money-losing U.S. subsidiary.

``GM has a lot Chrysler could gain from because they have the more modern technology,'' John Wolkonowicz, an analyst at Global Insight in Lexington, Massachusetts, said in an interview. ``I see GM as the stronger partner in any discussions.''

GM may not be DaimlerChrysler's only potential collaborator for Chrysler. The American auto company, purchased by the Germans in 1998, has struggled to fulfill the initial vision of former Chief Executive Officer Juergen Schrempp. Schrempp bought the Auburn Hills, Michigan-based company for $36 billion to transform Daimler into a global auto player.

Since then, the third-largest U.S. carmaker has bounced from losses to profits and back again as the high cost of U.S. manufacturing reduced its ability to compete with Asian producers such as Toyota Motor Corp.

DaimlerChrysler shares surged as analysts raised their estimates and price targets. The stock gained as much as 3.43 euro, or 6.7 percent, to 54.93 and was up 6.1 percent as of 10:06 a.m. in Frankfurt.

Increased Estimates

Morgan Stanley raised its share-price estimate for the carmaker by 13 percent to 62 euros. Deutsche Bank AG increased its projection to 73 euros from 54. Dresdner Kleinwort upgraded the stock to ``buy'' from ``hold'' and raised its price estimate to 65 euros from 47.

For GM, which too is struggling to trim costs, an alliance with Chrysler could also reduce vehicle-development expenses. GM CEO Rick Wagoner in October rejected a plan to link with Carlos Ghosn's Renault SA and Nissan Motor Co. Wagoner began those talks at the urging of billionaire GM investor Kirk Kerkorian, 89. Kerkorian, who had been GM's biggest individual investor, sold his remaining shares in December.

North America

So far, discussions between GM and Chrysler have focused on North American projects such as whether the automakers may share development of vehicles or engines, the people with knowledge of the talks said. The talks may not result in any agreements, they said. GM's U.S. sales fell 8.7 percent last year, and Chrysler's dropped 7 percent. Toyota sales gained 12.5 percent.

Renee Rashid-Merem, a spokeswoman for Detroit-based GM, and Mike Aberlich, a Chrysler spokesman, declined to comment.

German business publication Manager Magazin reported yesterday that talks were taking place about a possible purchase of Chrysler by GM. DaimlerChrysler CEO Dieter Zetsche declined to comment on the report yesterday during a media briefing at the company's U.S. headquarters.

Aberlich also declined to comment on a New York Times report, citing people with knowledge of the situation, that DaimlerChrysler had hired JPMorgan for advice on its strategic alternatives.

If talks resulted in a tie-up, it may not improve the competitive position of either GM or Chrysler. ``Technology-sharing alliances happen in this industry all the time,'' said John Novak, an analyst at Morningstar Investment Service in Chicago. ``Chrysler could benefit from GM's expertise in engine and powertrain development, but it alone is not enough to save GM or Chrysler.''

13,000 Jobs

Chrysler yesterday said it would trim 13,000 North American jobs and close a Delaware plant to return to profit next year after losing $1.5 billion in 2006.

GM last year finished buyouts and early retirements of 34,400 union workers as part of a plan to close 12 North American locations by 2008. The automaker lost $10.6 billion in 2005 and another $3 billion in the first nine months of last year.

Should talks with GM fall apart, DaimlerChrysler has other options. It could seek an alliance with Ghosn or turn to a Chinese company.

``One of the obvious partners is Renault-Nissan,'' said John Casesa, managing partner of Casesa Strategic Advisors LLC. ``Beyond that, it's not so easy to know who among the established automakers might be interested. The Chinese are the dark horse.''

As well as gutting the strategy of Schrempp, who retired in 2005, any sale would be a defeat for Zetsche, who won his job in part because of a revamp of Chrysler starting in 2000 that trimmed more than 40,000 jobs and restored profit at the unit. As recently as Feb. 5, he refused to recant an Oct. 26 vow that Chrysler wasn't for sale.

No-Man's Land

``Chrysler is in no-man's land,'' said Casesa, who is based in New York. ``It's not getting the benefit of being part of a big global auto company. At the same time, it doesn't have the independence that would make it more flexible.''

Chrysler might have an equity value of about $5 billion, Ron Tadross, a Bank of America Equity Research analyst based in New York, wrote in a report yesterday.

``We would not be surprised if there is good interest in Chrysler,'' said Tadross, who has a ``neutral'' rating on DaimlerChrysler shares. ``We see Chrysler as a decent business, at least relative to the other U.S. domestic manufacturers.''

Ghosn has said repeatedly that he eventually would like a North American partner, after GM and Ford Motor Co. rebuffed him on an alliance with Renault and Nissan. Yet Ghosn said on Feb. 8 that expanding his French-Japanese alliance now ``would be dangerous'' because he's focused on restructuring Renault.

``For the moment we have no comment,'' said Sophie Perrier, a spokeswoman for Boulogne-Billancourt, France-based Renault.

Shanghai Automotive

Shanghai Automotive Co., the publicly traded unit of China's largest automaker, might also be among carmakers big enough to buy Chrysler, Casesa said. Shanghai Automotive has joint ventures with GM and Volkswagen AG and in January unveiled the first vehicles under its own brand.

DaimlerChrysler should sell Chrysler's Dodge and Chrysler brands and keep Jeep, Stephen Pope, head of equity research at Cantor Fitzgerald LP in London, said in an interview.

Chrysler already has ventures to build vehicles with other automakers. In December, it picked China's Chery Automobile Co. to produce cars smaller than its current models, after deciding it couldn't make them profitably in the U.S.

Chrysler makes pickups in Michigan for Mitsubishi Motors Corp. and will build minivans for Volkswagen in the U.S. Some new Chrysler models such as the Dodge Caliber use transmissions from a Nissan supplier, all-wheel-drive from Mitsubishi and diesel engines from Volkswagen.

Automaker Partner

Pete Hastings, a fixed-income analyst at Morgan Keegan & Co. in Memphis, Tennessee, said he doubts Chrysler would find an automaker partner.

``We would be surprised to see Chrysler paired up with another auto manufacturer and believe a private-equity consortium would be a more likely buyer in the event a transaction were to take place,'' he said.

Private-equity buyers already are buying and bidding on makers of auto parts such as steering wheels, seats and carpet.

Wilbur Ross, a billionaire investor and chairman of WL Ross & Co., acquired most of bankrupt auto-parts supplier Collins & Aikman Corp.'s European operations and bought auto-interiors businesses from Lear Corp.

For Chrysler, ``the most logical buyer would be another carmaker,'' Ross said in an interview. Chrysler ``wouldn't fit'' with the parts suppliers acquired for his International Automotive Components Group LLC, Ross said.

Carl Icahn

Lear this month also agreed to a $2.8 billion buyout offer from billionaire Carl Icahn.

Cerberus Capital Management LP and David Tepper's Appaloosa Management LP are part of a group that agreed to invest $3.4 billion to take control of Delphi Corp., the auto-parts maker spun off by GM in 1999 and now in bankruptcy.

If Chrysler is sold, it probably won't be for a few years to let the current restructuring plan take hold and return the unit to profit, Christophe Boulanger, a fixed-income analyst at Dresdner Kleinwort in Paris, said in an interview.

The yield premium investors demand to own DaimlerChrysler's 1.25 billion euros ($1.64 billion) of 4.375 percent bonds due in 2013, compared with similar-maturity government debt, narrowed by 2 basis points to 72 basis points, according to Fortis Bank. A basis point is 0.01 percentage point.

Credit-default swaps based on 10 million euros of DaimlerChrysler debt fell 3,500 euros to 43,000 euros yesterday, according to Deutsche Bank AG. The price is at its lowest in more than five years, according to data compiled by Bloomberg.

-- With reporting by Jeremy van Loon in Berlin; Alan Katz in Paris; Carol Massar, Matthew Sigel, Jennifer Geller and Matt Nesto in New York; John Lippert and Mike Ramsey in Southfield, Michigan; and Steven Rothwell in London. Editors: Versical, Lear (guy/djs)

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Flybrian    0

No. Absolutely not. Again, Chrysler has absolutely nothing proprietary that GM can benefit from and a whole lot of baggage that could bring GM down.

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Dragon    0

I could see GM benefiting form something like this in the minivan and high performance turbo'd 4 bangers area's. but thats about it.

Edited by Dragon

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Z-06    493

Why are people harrasing GM to take their baggage?

Chrysler was made a whore by Kirky and Diamler and now they wanna marry her off to GM?

Come on find somebody else.

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z28luvr01    170

I see nothing that Chrysler does that GM doesn't (or can't) do better.

Volume RWD platform? Check.

Powerful, well known V8 engines? Check

Eye catching designs? Check

Brand with off road presence? Check

high-power 4cyls? Check

I hear the minivan issue, but an Outlook with sliding rear doors would blow any other minvan away. Honestly, from a need-need perspective, an Ford-Chrysler alliance makes a lot more sense. TOo bad Ford doesn't have the cash to pull it off.

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AxelTheRed    0

This really wouldn't be such an issue if good ol' Daimler-Benz hadn't effectively crippled Chrysler over the last eight years. A spin off of the company is what I'd rather see than to have it broken apart and sold off in pieces, or sold to another automaker, but there's not a chance that the Chrysler Group would be able to stand on its own right now.

Daimler-Benz needs to think of some more ways to get Chrysler back to profitability other than cutting workers. They'll shrink down, just like they did the last time, but when it gets right down to it, it doesn't matter if your volume is less than the demand, if you don't build cars that are chock full of quality these days, people will stop buying them.

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MyerShift    7

I had a feeling that this was the plot all along. Daimler had no real interest in Chrysler, only Jeep. I say if Chrysler does leave Daimler, it needs to take Jeep with it.

See? Chrysler was more successful by itself than tied with the Germans.

Why couldn't Chrysler stand on its own? What is Merc going to take away that is completely theirs or not produced under license?

I call for the independence of Chrysler now, as I did then, and always will.

Chrysler would be of no use to GM anyway.

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