The Fiat-Chrysler merge has become a big issue not only for Sergio Marchionne, but for both companies and its employees. Last time Fiat bought a part of Chrysler was in July 2012, completing 58,5% of Chrysler ownership. The remaining part was supposed to be gradually sold by VEBA fund based on a price agreed by both parties. After that what it was supposed to be an easy task has become a tricky negotiation game in which Marchionne and VEBA want to demonstrate their best negotiating skills. Fiat can buy up to 16,6% in tranches of 3,3% each, exercisable every 6 months between 2012-H2 and 2016-H1. No agreement means no Chrysler cash availability for Fiat, and means no completed merge of the two companies. Toyota leads world’s market with more than 8 million cars sold, VW heads to the first position thanks to its solid position in China, and GM continues to increase its business in third world markets. Fiat knows it must hurry in its plan of joining its activities with Chrysler if it wants to survive as an independent car maker. European mess has affected its operations and has forced the delay of new launches. So no merge means no new cars for Europe.
In the other hand there is Chrysler that was wisely saved by Marchionne and his team. Since 2009, the American car maker has benefited from Fiat’s know-how regarding small and efficient engines, and the US market recovery. Besides, it has been able to refresh its range of products and expand its business through Fiat’s dealerships in Europe and Brazil. Jeep is the biggest privileged brand as it will soon start production in China and Italy, and it has been able to boost its sales in Russia, Australia, China and soon in India. The collaboration between the 2 groups has brought to life the Dodge Dart, the new Jeep Cherokee, and the rebadged Fiat Freemont, and big Lancias, while Fiat brand was able to return to the US market with the successful 500. In other words, both companies have benefited after 4 years working together and now they need each other more than anything. That’s why the agreement is necessary for both.
Chrysler wouldn’t survive without Fiat’s know-how and its position in Italy and Brazil. Without Fiat, Chrysler would be rapidly absorbed by Ford (GM must pay its public loans first). Its business is highly concentrated in North America, so it wouldn’t have many chances as an independent car maker. Even if Chrysler’s financial result are quite good, it only sold around 2,2 million units last year, and more than 90% of these sales took place in North America. Fiat is in the same position even if its financial situation is different. The group sold almost 2 million cars in 2012, and was severely affected by European car industry crisis. The Brazilian brilliant division can’t do it alone. The three markets, North America, Italy and Brazil are good reasons to complete the merge, while a fourth region, Asia, is coming. The issue has become so relevant for Fiat that even the Italian labor unions are looking to solve the problem by meeting the VEBA leaders. This is the result of Marchionne’s latest announcements regarding a possible delay on Italian investments (the start of production of new models, such as the new Alfas). No investment means no work, no money and more economic problems for Italian labor force.
At the end, both parties will agree. None of them wants the IPO. Fiat wants to buy the whole package (100%); VEBA prefers to sell directly to Fiat; and third-party investors wouldn’t buy a 16% of America’s third automaker.
Click here to see the full study-case Fiat-Auto-Chrysler-The-IPO-That-Will-Never-Happen by Bernstein Research
Thanks to my friend Tom Haapanen for the document