Search This Site

Saturday, September 28, 2013

Fiat Chrysler Merger at Risk

Fiat Societa Per Azioni

The final act in the merger of Fiat and Chrysler is drawing near. Fiat owns 58.5 percent of Chrysler and is seeking to purchase the remaining 41.5 percent from the United Auto Workers trust fund which was set up when Chrysler went into bankruptcy in 2009. Negotiations with the trust fund, or VEBA (voluntary employees’ beneficiary association) as it is called, for the remaining shares had grown contentious over the past year and have finally come to a head this week when VEBA forced Chrysler to file paperwork for an IPO to sell the stocks on the open market. Instead of selling to Fiat, VEEBA is gambling that they will do better by offering their shares to the public.

Four years ago, Chrysler Corporation was a broken company. Years of mismanagement by an equity firm left the company at bankruptcy's door, and the last straw was the world economic crises of the period. The US government stepped in to prevent the sure loss of thousands of jobs that would have sent a shock wave throughout the already devastated economy. A call went out for someone to partner with the ailing US automaker, but the company was in such poor shape there were no takers. Chrysler was effectively written off by everyone except by one person - Sergio Marchionne, CEO of Fiat - who recognized the strengths and potential of a partnership.

Chrysler ownership breakdown 2009

Fiat was offered an initial 20 percent stake in the bankrupt Chrysler Corporation in exchange for giving the U.S. business access to its cutting edge technology valued at up to 10 billion dollars. Fiat's Marchionne was named CEO of the new company called Chrysler LLC and Fiat management was given responsibility for the day to day running of the company. Under this alliance, Fiat was allowed to increase its ownership level by set amounts when certain milestones dictated by the government were achieved. The final stipulation was that Fiat would have the option to purchase a majority interest in the company after all government loans were repaid.

Originally this repayment was scheduled to occur in 2014; however Marchionne shrewdly decided to pay the loans off early in 2011 saving the company substantial interest payments that were destroying the company's profitability. Under Marchionne leadership, Chrysler has gotten its mojo back and is a lean, responsive and profitable organization. The transformed Chrysler has had year-over-year sales gains for the past 41 consecutive months, dramatically improved quality and customer satisfaction scores.

Sergio Marchionne and John Elkann
Sergio Marchionne CEO of Fiat and Chrysler and John Elkann, Chairman of Fiat S.p.A and grandson of Gianni Agnelli

Fiat SpA
Meanwhile back in Italy, the past few years have not been rosy for Fiat SpA. In 2004, Fiat's Auto division was near collapse. Years of bloated bureaucracy and status quo management took a toll on what was once the world's third largest car manufacturer. Sergio Marchionne was hired in a last ditch attempt to save the then 105 year old car company. In a brilliant move, Marchionne threatened to exercise a put option that Gianni Agnelli had inserted into a partnership agreement with GM years back. This put option would have required GM to purchase Fiat's ailing auto division. Marchionne secured a 2 - 3 billion dollar payout from GM to avoid this and these funds were used to fund massive improvements in the company. In what was to become the template for the Chrysler turnaround, Marchionne cut bureaucracy, promoted young and eager executives and empowered workers to be their best. The Fiat 500 was created to celebrate the rebirth of the company in 2007 and that year marked the highest profits ever in 108 years.

It was an incredible comeback, unfortunately, the economic collapse was around the corner and hit Fiat hard. European cars sales hit a nearly 30 year low. New model investments were dramatically put on hold and labor issues conspired to drive sales even lower. Some argue that Marchionne's dual role of CEO of Chrysler and Fiat took interfered with running the Italian side of the alliance. They say that the workaholic Marchionne spent too much time saving the US Automaker and neglected Fiat. The counterpoint to this is that because Chrysler is doing well, Fiat posted a 586 million dollar trading profit last quarter and not a 169 million dollar loss it would have posted without Chrysler.

Fiat Chrysler Merger Timeline

All or Nothing?
This brings us to the matter at hand. Going forward Fiat needs to fully integrate with Chrysler in order to achieve the economy of scale that will allow both automakers to survive. They also need to have Chrysler assets available to them to weather the continued European automotive downturn. It is important to remember that Chrysler has these assets largely because of the work done by Fiat.

Under the agreement, Fiat can purchase VEBA's shares for a price determined by a formula worked out in 2009. The problem is VEBA, who is managed by an independent fiduciary, and Fiat are reportedly about 1 billion dollars apart from agreeing on a price. The IPO will force Fiat to pay market value for the shares, which VEBA believes is worth more than Fiat's offer.

While Fiat and the Agnelli family (who own and control the company) ultimately do have access to t that kind of cash, a billion dollars could fund important projects like a new Punto or Alfa Romeo models that are so desperately needed.

Marchionne has gone on record saying that if the IPO happens Fiat will have to reconsider freely sharing technology with Chrysler. This is because it would transform Fiat into what would effectively be a holding company instead of a single entity, damaging the economy of scale that Fiat is looking for.

Fiat has invested so much into this alliance that many analysts feel the two parties will eventually agree upon a price, and the proposed IPO will not happen. What we are witnessing is just a high stakes negotiation between two heavy duty players. Even if Fiat pays out the maximum amount of 6 billion dollars, the company will still win as it then will have full access to Chrysler's 12.2 billion dollars in cash.

This is going to be one fascinating poker game played out over the coming months. Stay tuned!

Read More:

Fiat Chrysler Logo

No comments: