It’s pretty much a long shot wrapped in a pipe dream, but The Wall Street Journal has reported Fiat Chrysler Automobiles CEO Sergio Marchionne has made overtures to GM chief Mary Barra about a potential merger of the two automakers. Marchionne is also reportedly reaching out to hedge funds and other possible allies to bring pressure to bear on GM to further his merger agenda. He says he’s crunched the numbers and his proposed deal with GM would yield up to $6 billion per year in savings in as few as four years.
Marchionne feels the global automotive industry would work best if it were consolidated down to a bare-bones core of only three companies with each producing about 15 million cars per year. The most likely participants in such a scenario would be the world’s three largest car companies — GM, Toyota, and Volkswagen. Developing engine and transmission platforms is hugely expensive and companies could save billions by pooling resources and effort to share power train platforms. Marchionne also argues consolidation could increase profitability by reducing worldwide production overcapacity — particularly in Europe — and duplication of engineering effort.
Fiat Chrysler has pretty thin margins relative to many of its competitors (see chart below). A cyclical downturn in light-vehicle demand could pose serious financial risks as Fiat Chrysler tries to fund its emissions-regulation obligations and technology investments. The company could benefit from pairing up with a partner with deep pockets and a global reach. Industry watchers note Marchionne is likely targeting GM after an activist GM investor successfully negotiated a stock buyback earlier this year. To avoid a proxy battle, GM agreed to use its hoard of cash to buy back $5 billion in shares by the end of 2016. In return, GM activist shareholder Harry Wilson agreed to withdraw his nomination to GM’s board and drop his shareholder proposal for GM to buy back $8 billion in stock.
Marchionne has been pitching his merger theory for some time, but has so far heard only crickets chirping from the likes of GM, Ford, and Toyota. Automotive mergers are extremely complex, fraught with agonies both expected and unforeseen, and history shows the failures outnumber the successes. GM and Fiat have partnered before, and it ended badly. In 2005 GM paid $2 billion to extricate itself from a deal to buy Fiat’s crumbling automotive operations. The DaimlerChrysler marriage was dysfunctional from the get-go, famously flamed out, and the US half of the union wound up in bankruptcy. Ford lost more than $4 billion after its 1990s plan to bring together Ford, Jaguar, Volvo, and Land Rover fell apart like a Le Car.
Speaking of Le Car, that infamous vehicle’s manufacturer, Renault, is one half of the industry’s most successful merger in recent history — the Renault-Nissan deal. But even for Renault-Nissan, parts sharing — the Holy Grail of any automotive merger — has been daunting to implement. Renault-Nissan aims for 70% of its vehicles to share a common pool of parts by 2020. If it meets that goal, it will have taken 21 years to accomplish. When GM already has a comparable level of parts sharing among its existing brands, why would it take on the risk of partnering with Fiat — again?
|Automotive Industry: 2014 Profitability|
|Source: Mergent Inc. financial data for Hoover’s Fiat Chrysler company profile|
James Bryant is a writer and editor for the First Research team at Hoover’s.