With Chrysler having filed for Chapter 11 bankruptcy on April 30, and General Motors expected to follow suit today, June 1 – the deadline set by the Obama administration – two of Detroit’s “Big Three” auto companies are now wards of the state.

While the entire global auto industry is suffering from a painful sales slump, with no company completely immune, Detroit’s meltdown has provided opportunities for well-positioned second-tier players to join the big leagues – by acquiring on the cheap some of the choicest assets of the fallen titans.

A bankruptcy judge is set as early as today to formally approve Chrysler’s takeover by Italy’s Fiat. While lawsuits from some disgruntled bondholders have delayed the inevitable, the reality is that Chrysler’s fate has been sealed ever since the White House made it clear months ago that the company’s existence as an independent entity is over.

Against the backdrop of pervasive economic nationalism in Washington, what is striking is how little debate there has been about Fiat’s takeover of Chrysler and its iconic brands – without even paying cash upfront for a 20% stake.

Fiat has the potential to boost its stake to 35% as it invests in reforming Chrysler’s US operations and as much as 51% after repaying Chrysler’s Treasury loans.

In contrast to controversies surrounding prior overseas acquisitions of far less prominent firms – Deutsche Telekom’s 2001 buyout of VoiceStream, Alcatel’s 2006 purchase of Lucent, not to mention CNOOC’s congressionally scuttled 2005 bid for Unocal – there is virtually unanimous acceptance of Fiat’s role in the process.

This is a function of the widespread recognition that the state of the Detroit-based automakers is truly dire. Thus, a foreign takeover of Chrysler is seen as preferable to a Chapter 7 bankruptcy, which would result in outright liquidation.

If another company from abroad were able – and, more importantly, willing – to take on the far more complex challenge of revamping GM, it is highly likely that Washington would endorse and even facilitate the transaction. Except that there is no auto firm on the planet, not even Toyota, that could realistically absorb the whole of GM, with its (gradually shrinking but still massive) list of 13 brands, and production in 34 countries on every continent.

Enter Magna International, a Canadian auto parts company that also owns Austria’s Magna Steyr contract auto manufacturer. Historically a supplier to GM, Magna seized the opportunity to bid for the bulk of GM’s European operations after the German and British governments made it clear that they will not accept the prospect of a bankrupt GM retaining control of their domestic factories.

On May 30, Magna and its financing partner, Russia’s state-controlled Sberbank, announced an agreement whereby they will take an aggregate 55% stake in a new company that will control the Opel brand in Germany and Vauxhall in the UK. GM will retain 35%, with Opel staff holding the remaining 10%.

Considering that GM Europe has a staff of 50,000 (not including Saab in Sweden) – roughly equal to the entire workforce of Chrysler – Magna’s acquisition is boosting its companywide headcount (currently at 74,000) by some two-thirds. It is highly unlikely that even a year ago, Magna could seriously contemplate the purchase of major brands and operations from one of its principal customers.

By the same token, Fiat’s takeover of Chrysler represents a cross-border strategic deal that opens the door to the North American market. By any measure, this is an ambitious undertaking, made even more remarkable, and ironic, by the fact that earlier this decade,

Fiat was in such a weak position that it almost sold its entire auto business – to none other than GM. As part of a partnership agreement signed in 2000, GM – at the time, easily the stronger of the two parties – received an option to buy the business. By 2005, however, as GM’s position was weakening, it declined to exercise the option, leading to the dissolution of the partnership.

Amid all this deal-making happening around it, Ford is in a tough position. It stands as the lone survivor among the “Big Three” – the only US automaker not to need (thus far) a federal bailout. But because it lacks the balance sheet to do much more than survive,

Ford has been unable to compete with lower-profile players like Fiat and Magna for the assets of its Detroit rivals.

The shape of Chrysler’s restructuring is substantially clear – it appears destined to be gradually subsumed into Fiat as its North American division. With GM, the plan is still in flux – such is the complexity of its global network of operations.

What is readily apparent, however, is that the GM that will exist five or even two years from now will be a mere shadow of the company that had been the world’s No1 automaker for 77 consecutive years – and it will remain a ward of the state, with an expected US Treasury stake of 72.5%.

In the meantime, Fiat and Magna will have plenty of time to ponder if what they just acquired represents the deal of the decade – or a bottomless money pit.

 Pavel Molchanov is a financial analyst in Texas. Email: pavel@alumni.duke.edu

• See also: Canada's Magna gets behind wheel at GM Europe