GM and Chrysler in preliminary merger talks: source

Separately, Ford Motor Co, plans to sell its shares from its controlling stake in Japan's Mazda Motor Co, a second source said.

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Finally, Barron's reported that GM was preparing to approach the U.S. Federal Reserve about borrowing money from the central bank's discount window because of the logjam in credit markets that has shut it out of other kinds of borrowing.

 

The moves come as all three Detroit-based automakers are struggling with a plunge in U.S. sales to 15-year lows and facing tough questions from investors and creditors about whether they have the cash to ride out a deepening downturn.

 

Representatives of Cerberus Capital Management, the private equity firm that owns an 80.1-percent stake in Chrysler, were not immediately available for comment.

 

Chrysler and GM declined comment. Ford representatives could also not be immediately reached.

 

Cerberus is also in exploratory talks with other parties, including Renault-Nissan, to sell Chrysler, the source said.

 

But any deal would hinge on the completion of the sale of Daimler AG's remaining 19.9-percent stake in Chrysler to Cerberus, the source said. Cerberus last month said it had approached Daimler to buy that remaining stake.

 

Chrysler's private owners and GM have had "very early" and "very exploratory" talks about a merger, the source said.

 

The talks between GM and Cerberus, first reported by the New York Times and the Wall Street Journal, began more than a month ago and are not certain to produce a deal.

 

The Journal said that Cerberus had proposed a swap of assets with GM that would give the private equity firm full ownership of finance company GMAC.

 

In exchange, GM would get the loss-making auto operations of Chrysler, the newspaper said.

 

Cerberus currently owns 51 percent of GMAC, GM's former captive finance company which has been hobbled by its exposure to the U.S. mortgage market. GM owns the remainder of GMAC.

 

LONG PROCESS

The reported talks between the two sides would revive discussions between Chrysler and GM about a potential merger in early 2007 when Germany's Daimler AG began the process of selling off Chrysler that culminated in a deal later that year to sell the automaker to Cerberus.

 

GM Chief Executive Rick Wagoner also said last year that he saw some potential for Cerberus to combine GMAC with Chrysler Financial, the finance company affiliated with the No. 3 automaker.

 

Analysts have questioned Chrysler's ability to survive as a stand-alone automaker, given its reliance on sales to North America for some 90 percent of its revenue.

 

But a combination with GM would match two companies with overlapping weaknesses, analysts said when merger talks first emerged.

 

For one thing, both GM and Chrysler have been hurt by their reliance on sales of trucks and SUVs. For another, both have been struggling to cut union-represented production jobs in reaction to weaker sales.

 

Chrysler has also had discussions about a tie-up with India's Tata Motors and Italy's Fiat in recent months.

 

GM shares fell to near a 60-year low this week on fears the global financial crisis could derail its turnaround plans.

 

GM and Ford both ruled out on Friday seeking bankruptcy protection.

 

NHK, Japan's public broadcaster, first reported that Ford, which has 33.4 percent of Mazda, plans to sell about most of its stake and has already approached Japanese companies on the sale.

 

GM shares fell as low as $4 early on Friday, the lowest price for the stock since 1949, but recovered and ended up 13 cents, or 2.7 percent higher, at $4.89 on the New York Stock Exchange.

 

Credit ratings agency Standard & Poor's said on Thursday that both GM and Ford had adequate liquidity for 2008, but deteriorating industry fundamentals would make liquidity a serious challenge in 2009.

 

Also on Thursday, industry forecaster J.D. Power and Associates said the global auto markets could be in danger of an "outright collapse" in 2009 as a slowdown that began in North America spills over to other markets.

 

U.S. auto sales have fallen for three consecutive years to hit 15-year lows in recent months.

 

Many analysts now expect further declines in 2009 and some slowing in other regions around the world, adding pressure on GM and other U.S. automakers that have been restructuring.

 

GM, which posted a second-quarter net loss of $15.5 billion, announced plans in July to improve its liquidity by about $15 billion by the end of 2009, about two-thirds through cost cuts and the rest through asset sales and new borrowing.

 

Ford, which posted a $2.7 billion net loss in the second quarter, went to capital markets to raise more than $23 billion in late 2006. Ford Chief Executive Alan Mulally said earlier on Friday that the company was watching its cash flow carefully.