If Fiat dumps Chrysler, will GM and Chrysler merge?

It's beginning to look like the cozy little plan of salvaging Chrysler through an investment from Italy's Fiat is going to fall flat on its face. And if it does, this will leave the U.S. in an awkward position. In addition to forking over another $77 billion to get General Motors Corp. (GM) over its bankruptcy hump, it will need to deal with Chrysler as well. And that could mean more taxpayer money going to finance a merger between the two.

A few weeks ago, it looked like Fiat would give access to technology, platforms and research worth $10 billion in exchange for a 35 percent ownership stake in Chrysler -- thereby taking some heat off the U.S. government. Chrysler has already received $4 billion in U.S. loans, but that will only last for two more weeks, so it wants $9 billion more.

President Obama said that if Chrysler could find a partner, then it would be eligible for $6 billion in additional loans to make a deal work. But now Fiat is demanding that Chrysler's unions make cuts as a condition of the investment, and the unions are not going down without a fight. So what if the Fiat deal falls apart? As I posted last November, Chrysler and GM could become one.

Since November, things have advanced on that front -- in particular, there's been talk of using section 363 of the bankruptcy code to create a good GM and a liquidating GM. If Chrysler and GM merge, the U.S. could use the same approach to creating the new Chrysler/GM. To the good GM -- which would include Chevrolet, Cadillac and GM's China operations -- the merger would add Chrysler's Jeep. The rest of GM and Chrysler would go into the liquidating entity.

The Chrysler/GM merger option would likely involve even more government loans, adding to the $77 billion in loans already contemplated to salvage GM. It sure is expensive for taxpayers to take over when management fails . . . and fails . . . and fails again.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.

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