General Motors has finally agreed to pay Fiat €1.55 billion ($US2billion) to avoid the compulsory purchase of Fiat Auto, the origins of which lay in a ‘put’ option agreed between the two companies five years ago. Understandably, GM was loath to purchase another loss making automobile manufacturer while its own European brands, which include Opel and Saab, have been unprofitable for some time.
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For Fiat Auto, which is currently recording an annual loss of around €1 billion and is still struggling to build market share, the sale of its automobile division may have had its advantages. However, faced with deadlock, both companies deemed a cash settlement to be less painful than a long, drawn out court case.
Although the companies have attempted to maintain some aspects of their working relationship, notably the retention of joint intellectual property rights for a range of diesel engines that were jointly designed, and GM’s continued use of a Fiat plant in Italy for parts of its European engine operations, much of the alliance will seemingly be dismantled.
Fiat was always better positioned to dictate the terms of the deal. However the company is still facing significant losses from its operations and needs a long-term sustainable recovery. The cash will help in the short term, and may give the company time to restructure its operations.
Although the deal will also help GM’s credit rating, the entire debacle does not remove the underlying issue of the unprofitable European operations which will not be affected by its extrication from the ‘put’ option.
While both companies will be glad to have settled the dispute it does not alter the many underlying problems that they are facing. They must now concentrate on their respective restructuring programs to ensure a return to profit as rapidly as possible.
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