Sergio Marchionne has made no secret of his desire to see a merger of FCA with General Motors. Overtures to GM have, however, been rebuffed. Bill Cawthon considers Marchionne’s strategy and the merits – or not – of a proposed consolidation from GM’s vantage point.
"Donchisciottesco" is the Italian word for quixotic or, more precisely, for being like Cervante's Don Quixote, who tilted at windmills as he lived in a fantasy world of knighthood and romantic chivalry.
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"Marchionnesco," or the quality of being like Fiat Chrysler CEO Sergio Marchionne, may enter the Italian lexicon as a description of one who tilts at large corporations while living in a fantasy world of finance and goals that may not only be impossible, but undesirable, as well.
There is even a Lady Dulcinea of sorts, GM CEO Mary Barra, who remains unimpressed by Sergio Marchionne’s feats of accountancy and analysis and continues to resist both his hugs and Fiat Chrysler Automobiles as a potential suitor.
With bold tales of synergies and savings, Marchionne continues to duel GM senior executives who don’t see them and wonder why one of the world’s top dealmakers won’t leave them alone.
The reason is very simple: money. Marchionne’s calculations say that a merger of the two companies would produce an EBITDA (earnings before interest, taxes, depreciation and amortisation) of $30 billion.
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By GlobalDataConsidering that the two companies’ combined 2014 EBITDA was about $21 billion (GM’s was not quite $11.9 billion and Fiat Chrysler’s was $9.1 billion), an additional nine billion or so dollars makes a very strong case for merging. Irresistible, in fact, to those who look only at the potential cash haul.
Savings would come from elimination of duplication in product development, pruning of product overlaps and “rationalisations” or, as they’re better known, layoffs and plant closings.
The merger offers huge potential benefits to Fiat Chrysler and Exor, the conglomerate that has effective control of FCA. GM has cash but just as important GM has engineers, alternative powerplant technology and is well established in markets that FCA needs to grow or penetrate.
For GM, the benefits include Jeep and, well, Jeep. Maserati adds a high-end, ultra-premium line and Alfa Romeo could fit in there somewhere. Fiat is doing better than GM in the Latin American markets, though that isn’t exactly a huge plus at the moment.
Perhaps “Don” Marchionne believes the best thing Fiat Chrysler brings to the table is him. Does anyone really envision his plan calling for Mary Barra to be the CEO? In fairness, I don’t think Marchionne would have liked Dan Akerson, Ed Whitacre or Fritz Henderson, either.
The merger of FCA and GM would create the world’s largest automaker almost overnight. The two companies’ combined 2014 total worldwide deliveries of 14.62 million vehicles would have easily beaten Toyota’s 10.23 million and Volkswagen’s 10.14 million.
The problem with all of this is first, the two companies don’t want to merge and, second, that mergers seldom deliver on their promises.
GM sees a merger as a losing proposition. Rightly or wrongly, their senior executives and board believe that the path they have outlined is the correct one for them. Considering the actual synergies almost entirely favour Fiat Chrysler, GM has taken the view that it would be bailing out the smaller company.
Fiat Chrysler Automobiles isn’t ready for another merger: it hasn’t finished merging with itself. This can be seen in the treatment of the Chrysler and Dodge brands and the “which-way-is-the-wind-blowing” approach to SRT. It’s also obvious in the failure of FCA to arrange for Iveco to supply a Class 3 van or a dual-rear-wheel configuration to give ProMaster a full range of light commercial vehicles, including cutaways.
If one looks only at $30 billion, one misses the fact that the costs to get there may outweigh, and outlast, the transitory benefits.
How many key people are going to be cut? How many are going to leave, especially in the face of a hostile takeover? How much scarce engineering talent will find greener pastures elsewhere?
How many of those 14 million sales are going to be offered to the competition? It shouldn’t be forgotten that Fiat Chrysler and GM already offer the highest incentives of any major automakers. Is what might be a very high cost of customer retention included in Marchionne’s figures?
This history of business is littered with the corpses of failed mergers. DaimlerChrysler comes to mind, as does the previous tie-up between General Motors and Fiat. People point to the Renault-Nissan Alliance but they forget that it wasn’t a merger. While Carlos Ghosn is the CEO of both, they are still separate companies.
Other than access to General Motors’ piggy bank, there is no good business reason for Marchionne to demand a merger when other avenues would produce significant savings at a far lower cost. They would also preserve the competition that drives so much of design and technology advancement.
In reality, the fact that he is prepared to attempt a hostile takeover underscores the fact he can’t even make the business case to GM. Others should be as wary.
See also:
US: Marchionne merger overtures to GM's Barra rebuffed
US: GM cool on Marchionne’s approach for a deal
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