ANALYSIS: Everybody loses in the collapse of the GM-Fiat marriage arrangement
Even by the standards of the auto industry the collapse of the arranged marriage between Fiat and GM is one of the most extraordinary disaster deals. Whatever happens next, everybody loses.
The pity of it is even greater because the blushing couple got along pretty well for five years at the commercial level. They have managed to develop platforms together. They have created commonality out of engines and gearboxes. And they have made some substantial savings by the joint ordering of components.
But now it will be only the lawyers who will be blushing. With embarrassment at the size of the fee fest.
GM is without doubt the dummy in the deal. Five years ago, the sweeping up of minor automotive assets worldwide was in full flood. GM was somewhat flatfooted and found itself in competition to get a holding in Fiat Auto. In order to beat the competition it made a promise that it would buy the whole of Fiat Auto from Fiat Group any time after January 24th this year if Fiat Group demanded it.
It can be of no surprise that Fiat wants to sell when you look at the state of its group finances. And when you look at GM's plight in Europe you see at a glance why the cost of a fancy wedding is out of the question.
Fiat Group has made a total trading loss of six billion dollars over the last three years. GM was bright enough to see that in the making and when there was a $5.6 billion recapitalisation two years ago, GM declined to take part. A consortium of banks stepped in and took up the offer. In the event of non-repayment, the banks would convert debt into shares. Guess what? By the end of this year the banks could own a controlling shareholding in Fiat and GM will have a whole new bunch of suits to talk to.
Fiat Auto has done what it can to be competitive and commercial but apart from its little subsidiary known as Ferrari, which is as competitive on the racetrack as it is possible to be, there's nothing doing. Fiat's European market share has halved in the last 15 years to 8%. Alfa Romeo has remained stubbornly below 200,000 units a year and Lancia looks like it is heading below 100,000. There is no American presence of any worth and the grip on emerging markets is confined to Brazil, Turkey and Poland.
And it's not as if Fiat has protected the rest of the group business at Auto's expense. In 2003 the two really big operations of aviation and insurance were sold with the proceeds ploughed back into auto.
And GM Europe's audit? Well it's losing money so fast that there is a restructuring in place that will take out 12,000 jobs and cost $1 billion. That will ensure that the operation loses money for the sixth year in a row. And at Saab, which is wholly owned by GME, GM US board members are busy "reviewing the future." It's a pretty black and white choice: more cash or shut it.
With redundancies in Scandinavia, redundancies in northern Europe and the UK, GM needs a massive redundancy programme at Fiat in Italy like it needs a hole in the head.
Today's confirmation that talks have broken down is no surprise. They have actually broken down within the period (from January 24) which was allowed for reconciliation of the dispute.
The warring parties now have a number of complaints against each other for non-performance as a result of which there could be court hearings within the jurisdiction of Manhattan or - rather curiously - the Netherlands where Fiat is formally registered.
GM paid $2.5 billion for its initial 20% stake. That stake was written down to a carrying value of $220 million in 2002 and is now worthless. Looked at from GM's point of view it is worth less than nothing because GM will have to pay its way out of the dead deal. And the more it pays, the greater the damage to the balance sheet. And with just a tad more damage, the balance sheet is shot, the bond ratings could fall to junk status, the investment holders have to sell the debt and a financing crisis begins.
Or would you rather be Fiat, left in the hands of the Italian banks?
Whichever way up you look at it, this was a lose:lose deal and spectacularly crafted to achieve it.