Now that the split has happened, an anonymous Mercedes executive has talked up the idea of partnering with BMW to Auto Motor und Sport. BMW and Mercedes are already partnering on hybrid development as well as cooperating on diesel after-treatment systems. Partnerships that are limited in scope such as technology or purchasing make some sense but a full merger would probably be a really bad idea, since there is almost complete product overlap and competition between the two companies.
[Source: Automotive News - Sub. req'd]