It has been over a year since hedge fund Cerberus bought Chrysler and installed Home Depot (HD) pariah Robert Nardelli as the car company’s unlikely CEO. Cerberus coughed up $7.4 billion for the privilege of owning the third largest auto firm in the US.

The day after the deal was done. the auto industry began its precipitous decline. That trend has accelerated ever since. Nardelli has spent most of his time firing people and closing plants. The betting in Las Vegas is that Chrysler lost over 30% of its sales in June when compared to the same month last year. That would put its US market share well below 10%.

Cerberus keeps saying that it is happy with its investment in the car company, but hedge fund managers are poor liars and if the deal could be undone, Cerberus would do it.

Across town at Ford (F), matters are just as bad. The company’s stock has fallen so far that its market cap is only $10 billion. Wall St. assumes that the company will have to raise more money. Billionaire Kirk Kerkorian has taken about 6% of the company. He is too old to be patient.

The US car companies have cut costs about as far as they can. There may be a plant or two to be shut down, but the big saving came in the last two years and were topped off with new and improved contracts with the UAW.

A merger of two of the US car companies is a must now. The other option is that Ford or Chrysler are bought by an overseas company like VW. If they want to stay independent, they need to get more scale and further cuts.

Merging two public companies in the industry would be hard. The question of who runs the company and who gets board seats could kill a deal between Ford and GM (GM). But, Chrysler does not have that problem. Cerberus has the only vote that counts.

Kerkorian and Cerberus both need a way out. Putting together Ford and Chrysler may well be the ticket. Consolidating two large car companies does offer more opportunity for cuts. One set of managers can be let go. Product development and advertising costs can be bought down. Weak brands like Dodge and Mercury can be shuttered. Ford has a successful overseas operation which could help Chrysler products get distribution.

Cerberus also has access to capital. Ford, and perhaps Chrysler, will need to restructure debt to give the company’s time to get though the current rough period. Cerberus almost certainly has the muscle to do that. With Kerkorian’s ability to bring in money,  the restructuring of a merged operation would be even more likely.

Putting the two companies together would allow them to have a 20% to 25% piece of the domestic market. That would put Ford/Chrysler on a footing with GM and Toyota (TM).

Without a merger, one of the companies goes away.

Douglas A. McIntyre

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