Is another massive automotive merger in the works?
It's possible: Shares of Fiat Chrysler (NASDAQOTH: FIATY ) rose nearly 4% in early European trading on Thursday after a German business magazine reported that arch-rival Volkswagen (NASDAQOTH: VLKAY ) may have approached key FCA shareholders about acquiring the company.
It's just one report, and neither company was willing to confirm it. And there are good reasons to believe that it's just speculation.
But an acquisition of Fiat and Chrysler could make quite a bit of sense -- at least from Volkswagen's perspective.
Why VW might want to buy FCA
Here's what we actually know as of right now: In a preview of its Friday cover story, Germany's Manager Magazin reported (text is in German) that Ferdinand Piëch, the chairman of VW's supervisory board and a member of its founding family, had approached representatives of the families that control Fiat about a possible acquisition.
So why would VW want FCA? There's one good obvious reason, and it's the reason that gave this report instant credibility with investors: VW has struggled mightily in the United States recently.
An acquisition of FCA would give VW control of Chrysler's large, well-established network of U.S. dealers. VW would also get the Jeep SUV and Ram pickup brands, major players in several of the industry's most profitable market segments.
What's more, buying FCA would instantly catapult VW to its long-held goal of being the world's largest automaker, by a wide margin. In terms of global sales volumes, VW-plus-FCA would blow right by Toyota (NYSE: TM ) and leave General Motors (NYSE: GM ) in the dust.
VW has also shown some interest in acquiring another FCA holding, the Alfa Romeo brand, in the past. Alfa's long and rich history in motorsports still resonates with enthusiasts around the world, and the brand could have (largely untapped) potential as a complement to Porsche, which VW also owns.
Once it fully integrated the acquisitions, VW would have economies of scale that would dwarf those of all rivals, which could make it massively profitable if VW was able to realize their potential. And with FCA's market cap hovering around 9.5 billion euros, VW can afford the acquisition -- even at a substantial premium.
On the Fiat side, Manager Magazin's report suggests that the Agnelli and Elkann families that control FCA are eager to withdraw from the mass-market auto business. The families would keep control of FCA subsidiary Ferrari, according to the report, while selling the rest of the company to VW. (It's unclear what would happen to the Maserati brand, which is technically owned by Ferrari.)
So there are good reasons to think that there might be some substance to this report. But there are very good reasons to doubt that a VW-FCA merger will happen, too.
Why a merger might never happen
Let's start with this one: Exor, the Agnelli family company that owns its substantial stake in FCA, denied that VW had approached it about a merger in a statement on Thursday morning.
Of course, it's not exactly uncommon for companies exploring a merger to deny all reports in the initial stage of talks. But there are other reasons to think that this marriage isn't in the cards.
A Wall Street Journal report on Thursday cited a source who said that FCA -- the company formed from the merger of Fiat and Chrysler -- was incorporated in the Netherlands in order to take advantage of Dutch laws that make it easier for the Agnelli family to keep control of FCA. That suggests an intent to hold the company long term, not to sell it off to VW.
And the Manager Magazin report itself said, the two parties were still far apart on price and FCA CEO Sergio Marchionne was pursuing other strategic options. It's unclear what those options might be, but Marchionne has long been a harsh critic of Volkswagen, which has beaten up Fiat badly in the companies' home market of Europe. Marchionne has had especially bitter words for Piëch in the past. It's unlikely that he'd be happy to go to work for VW.
Finally, there's this: What would Volkswagen do with the Fiat brand itself? Fiat competes head-on with VW in many parts of the world. But Fiat has struggled to make money in recent years. In places like southern Europe, there are arguably too many car brands chasing too few buyers. Taking Fiat out of the market might allow the surviving competitors to thrive -- but would risk a massive public outcry.
(Why? Think about the political implications of a German company wiping out a century-old Italian industrial leader. Think about how that would play out with, say, politically powerful Western European labor unions.)
Is VW -- or for that matter, the Agnelli family -- willing to deal with the political firestorm that would come with a decision to close Fiat down? Alternatively, is there any way that VW can fit Fiat into its global operations profitably?
The upshot: Don't get too excited -- yet
While a VW-FCA merger would seem to have big potential for Volkswagen, there are a lot of obstacles, and a lot of reasons to think it would never go past the casual-conversation stage.
On the surface, it has the potential to shift the balance of power in the global auto business. But it also has the potential to be an expensive and time-consuming headache for VW, which is already struggling to make its existing mass-market brands more profitable.
So, will it happen? It's hard to say right now. Don't bet on it -- but don't bet against it, either.
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