By Jui Chakravorty Das and Kevin Krolicki
NEW YORK/DETROIT (Reuters) - General Motors Corp
GM intends to seek U.S. government aid to support any deal, the sources said, potentially injecting a polarizing and urgent question of economic policy into the final stretch of the presidential campaign.
Cerberus, the private equity firm that controls Chrysler, also remains in talks with other parties, including Nissan Motor Co Ltd <7201.T>, about a deal for the struggling automaker.
GM, Cerberus and Chrysler declined comment.
But the GM talks are the most advanced and involve at a working level GM Chief Operating Officer Fritz Henderson and senior Cerberus representatives, sources said.
Chrysler Chief Executive Bob Nardelli and GM Chief Executive Rick Wagoner remain in close contact with negotiators, they said.
Cerberus, which owns 51 percent of former GM finance arm GMAC, is interested in an increased stake in the unit, sources said. GM has 49 percent of GMAC at present after selling a controlling stake to the private equity firm for $7.4 billion in a 2006 deal.
Cerberus is also interested in offloading the auto operations, but would like to have a significant stake in the combined company, the sources said.
Both parties remain interested in reaching a deal, but GM is working to clarify Chrysler's pension liabilities and the risk the automaker's suppliers could face from a merger, the sources said.
Analysts and others close to the talks have suggested that 30 percent of Chrysler's current suppliers could be at risk if GM completed an acquisition and worked to cut Chrysler's slower-selling and weaker models.
GM is also considering contingency plans in case the Cerberus talks fail to produce a deal, sources said.
Those alternative scenarios include approaching an outside investor and asking the government for stepped-up assistance of some kind, one person briefed on the talks said. GM has lost more than $50 billion in the last three years.
With auto sales slowing sharply in Western Europe and on track to drop to near 18-year lows in the United States this month, GM is under increasing pressure to slow a cash burn rate that stood at $3.6 billion in the second quarter and is expected to have accelerated since.
A major motivation for GM to acquire Chrysler has been access to the smaller automaker's remaining cash, sources have said. Chrysler lost about $1 billion in the first half of the year and ended June with $11.7 billion.
'UNIMAGINABLE TIMES'
The slump in the U.S. market has hit Chrysler the hardest with its sales dropping 25 percent to date. GM's sales have dropped 18 percent.
Partly for that reason, analysts have challenged the logic of a merger, arguing both companies are saddled with many of the same problems including a surplus of workers, plants, brands and dealers.
Chrysler told employees on Friday that it would cut up to 5,000 salaried jobs and limit capital investment and other spending.
"These are truly unimaginable times for our industry," Chrysler's Nardelli said in a stark letter to staff. "We continue to be in the most difficult economic period any of us can remember."
GM would prefer to keep as much of the combined sales volume as possible from a Chrysler acquisition, but recognizes that some of the automakers' slower-selling models would have to be culled, sources close to the talks said.
A GM acquisition of Chrysler would also likely trigger 30,000 to 40,000 job cuts as the combined automaker would rush to cut costs, people familiar with the talks have said.
By working on how the deal would impact suppliers, GM could also be laying the groundwork for a U.S. government aid request on the basis that any funds provided would help protect jobs beyond Detroit.
Members of Michigan's congressional delegation earlier this week urged the Bush administration to consider steps prop up the U.S. auto industry, including bailouts similar to the initiative now underway for banks or the kind of loan guarantee that saved Chrysler nearly 30 years ago.
The request to U.S. Treasury Secretary Henry Paulson noted the auto industry's importance in the economy. Automakers employ about 355,000 American workers and provide jobs to another 4.5 million in related industries, including suppliers.
Shares of GM were down 10 percent on Friday and have lost 78 percent since the start of the year.
(Editing by Derek Caney, Gerald E. McCormick, Gunna Dickson, Leslie Gevirtz)
