Merger on hold! Feds not backing play, investors backing off

Plans for an Election Day merger agreement between General Motors and Chrysler hit a snag Thursday when the Bush administration ruled out funding for it. Without the federal funding, the private investors with whom the automakers had been talking are not interested in the deal.

Citing three people with direct knowledge of the talks, Reuters reports this essentially puts any possible tie-up between the two automakers on the back burner until after the election and possibly until the new Administration and Congress take office in January.

The latest twist in the saga of the U.S. auto industry’s implosion makes the future even more uncertain as GM, Ford and Chrysler, cut off from affordable credit, burn through precious cash. However, it does re-open the door for Cerberus to discuss a possible partnership with the Renault-Nissan alliance, an arrangement that makes more sense if the Auburn Hills car company is to remain in business. One of the Reuters’ sources said Cerberus had viewed the French-Japanese partnership as a backup plan if the merger efforts failed. While a tie-up with Renault-Nissan would reinforce existing production agreements, it would be unlikely to bring any fresh cash to Chrysler’s coffers. Carlos Ghosn, CEO of both Renault and Nissan has said his companies would not be willing to deplete their cash reserves in any merger or acquisition.

GM and Cerberus declined comment. Chrysler said it was pushing ahead with its own restructuring plans while it works on developing new vehicles, including a plug-in hybrid. The company has already announced it will cut its salaried headcount by 25 percent.

Chrysler spokeswoman Lori McTavish said, “We are taking the tough but necessary decisions to stabilize the business in the short-term and making the viable long-term business decisions to restructure the company for the future.”