BMW is being driven by the desire to cut costs. One can only assume that Mercedes, for all of its protestations, has the same thing in mind. Every carmaker is coming out with a raft of smaller cars to serve multiple purposes, among them: meet CO2 emissions and CAFE standards, put on a green face on for the public, and, of course, increase volume by selling more inexpensive vehicles.
While we're sure consumers would like to imagine each maker bringing its own technology -- and specifically, intangible brand feel -- to its vehicles, the business case cries out for closer cooperation for economies of scale. We aren't sure yet how BMW and Mercedes will be joining up, but we're pretty sure that they'll be doing so in some substantial way soon enough.