The dispute between Fiat and GM, about the validity of a contractual clause allowing Fiat to force the sale of its auto division to GM, remains in mediation.

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However, beleaguered GM will want to avoid the purchase altogether while Fiat would arguably rather receive a cash injection than hive off the company. Indeed keeping Fiat Auto in Italian hands for the moment may be the best bet.


The ongoing dispute between Fiat and General Motors began when Fiat exchanged a 20% stake in its automobile division for a 6% share in GM. The deal also provided Fiat with an option to sell the remainder of Fiat Auto to GM in January 2005.


Each company’s finances have taken a turn for the worse since they signed the agreement. Fiat Auto has made a profit in only one of the last six years and its record loss in 2002 led to a widespread restructuring program.


GM has also been struggling, battling with high healthcare costs in the US and the loss of market share both in its domestic and European markets. With its own credit rating only just above Standard and Poor’s junk status, GM is understandably loath to take on a failing company, arguing that the original terms agreed are no longer valid.

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The US company maintains that the ‘put option’ was rendered invalid by the sale of the majority of Fidis, Fiat Auto’s financing arm, and a recapitalization that reduced GM’s share in the unit from 20% to 10%. Fiat claims that it does not consider the changes to have in any way affected the deal.


While GM is unlikely to end up purchasing Fiat Auto outright, Fiat has the upper hand and will at least receive cash in exchange for the option. This would be the most amicable solution, enabling GM to avoid taking on a failing company and providing some solace for its credit rating. Fiat, meanwhile, would end up with a cash lump sum and retains a company that it could develop or sell.


Indeed, potential interest in a company such as Fiat Auto could come from many corners, not least from one of the many Chinese carmakers searching for a European brand, so Fiat might be wise to hold onto the division. Neither would gain from a protracted legal dispute and a compromise appears the most likely outcome.


SOURCE: DATAMONITOR COMMENTWIRE (c) 2005 Datamonitor. All rights reserved. Republication or redistribution, including by framing or similar means, is expressly prohibited without prior written consent. Datamonitor shall not be liable for errors or delays in the content, or for any actions taken in reliance thereon.