The rumor that started many months ago was confirmed by both companies and if they agree on every aspect, then they will create one of the biggest auto conglomerates worldwide.
PSA issued a statement that said, "Following recent reports on a possible business combination between Groupe PSA and the FCA Group, Groupe PSA confirms there are ongoing discussions aimed at creating one of the world's leading automotive groups".
After ditching a proposed merger with Renault in June, Fiat Chrysler (FCA) chairman John Elkann confirmed the group's bid to pursue an alternative alliance as auto makers face huge investments for electrification, emission reduction and autonomous driving technologies.
Fiat Chrysler shares are down 8.5 percent this year while Peugeot has risen 33.3 percent.
A merger could see the Chinese government take a role in a company that includes Chrysler, a USA industry icon. The company is controlled by the Fiat-founding Agnelli family, represented by chairman John Elkann.
A merged carmaker would have combined sales of almost 10 million a year, based on 2018 results. That comes on top of Fiat Chrysler's joint venture with another Chinese company, GAC. By comparison, both Volkswagen and Toyota sell over 10 million cars a year, while the Renault-Nissan-Mitsubishi alliance nearly 11 million.
However, both PSA and Fiat Chrysler have factories across Europe running below capacity, meaning rationalisation and closures are likely to create savings.
The talks come months after a proposed tie-up between Fiat Chrysler and French carmaker Renault collapsed.
"The Chinese government doesn't want to have a strong connection with an American company", Dudenhoeffer said, due to economic damage brought by the Trump administration's tariffs.
Merging the two manufacturers would create an industry powerhouse that sold 8.6m cars a year ago. That's notably thanks to an unusual $4.1 billion bailout in 2014 in which Dongfeng and the French state gained stakes. "PSA also has the technology to help with FCA's carbon emission issues".