Fiat Chrysler (FCAU) CEO Sergio Marchionne has made no secret of his desire to merge his company with General Motors (GM -0.17%).
And he's not taking "no" for an answer.
In a lengthy interview with trade publication Automotive News that was published on Sunday, Marchionne again pushed the issue, saying that he has crunched the numbers and that it would be "unconscionable not to force a partner."
His board of directors has no choice, he said: It's time to pressure GM into a merger.
Is this for real? And what would it look like?
Image source: Getty Images.
Marchionne: A GM-FCA mashup could be huge
First of all: Yes, it's for real.
Marchionne is, after all, the CEO who mashed up Italy's Fiat and Detroit's Chrysler -- and made it work better than anyone expected. He has a record of delivering on audacious-sounding promises. Don't bet against FCA trying some sort of hostile takeover of GM in the coming months.
Why? Because Marchionne has a big problem: Fiat Chrysler, for all of its synergies and product-development success, is not a healthy company.
It's the only global automaker with more debt than cash. Its profit margins in North America aren't close to GM's and Ford's -- despite a truck-heavy portfolio that should be generating fat profits in the current market. It's losing money in most other parts of the world. And it's far behind most global rivals in developing self-driving and profitable battery-electric technologies.
Marchionne says that FCA is making progress on all of those fronts and can survive without a merger, albeit "in mediocrity." But a merger with a heavyweight that could add scale and synergies (and cash) makes the most sense, he insists.
Marchionne argues that consolidation is necessary for the industry's long-term survival. He says that companies waste billions developing essentially similar products and technologies independently, and that reducing the industry to fewer companies with greater economies of scale would radically reduce costs.
The thing is, he's right -- when looking at the industry as a whole. A merger of FCA with a larger rival could benefit consumers and the surviving companies. But does that mean that a merger of FCA with GM is a good idea?
GM has zero interest in playing along with this idea
GM's response to the idea was blunt: Why, an unnamed senior executive asked Automotive News, should GM bail out Fiat Chrysler?
CEO Mary Barra has said repeatedly that GM, which is one of the world's three largest automakers, has adequate scale to survive long-term without a merger. Her focus is on realigning GM's global operations and product portfolio to take best advantage of that scale and boost GM's profitability, a project that should be largely complete in 5 to 7 more years.
Trying to integrate FCA with GM would be a massive distraction from that effort, she argues. She's right.
Meanwhile, Marchionne says that the benefits for both companies could also be massive. He thinks the two, combined, could generate $30 billion a year in pre-tax earnings.
That's not actually out of the question, in a market like the one we have in the U.S. right now. Marchionne says that he has a whole plan for consolidating the two companies' global product lines and rationalizing production.
But he has also promised that any FCA merger wouldn't hurt dealers or eliminate U.S. manufacturing jobs. It's hard to see how he could consolidate the old Chrysler's operations with GM North America -- and boost profits for both -- without closing factories or eliminating brands.
The upshot: Can Sergio force a merger that actually works?
To answer the question in the headline, I think FCA is going to try to force a merger. Whether it will succeed, we'll see.
As a GM shareholder, I don't like this idea one bit. I think it's possible that GM and FCA could integrate and benefit in the long run -- but a lot of the theoretical benefit, at least in my mind, comes from eliminating less-competitive FCA products and factories and assuming that GM could win all of those sales.
Long story short, as I see it, the only way for GM to "win" in a merger is to essentially eliminate much of FCA's product while using its production facilities (and the resulting hole in the market) to add scale.
That would be a costly undertaking in more ways than one. But I suspect that Marchionne has a different plan in mind, one that wouldn't look so good for GM -- and I suspect we're going to find out a lot more about it in the weeks to come.
