When auto companies merge, they tend to be large-scale mergers with both sides touting numerous benefits. But it's one thing to close the deal and another to make the new arrangement beneficial to shareholders. Following recent developments at Fiat (NASDAQOTH:FIATY), the Italian automaker will soon begin a closer relationship with its merger partner, Chrysler, and the integration could make or break shareholder returns.

Auto merger
With automakers generally being very large operations, mergers are less common, but proper integration can unlock lots of new synergies in everything from research and development cost savings to greater economies of scale in production. One such merger that had been rumored for a long time was that between Fiat and Chrysler. The rumors were confirmed a few months ago, when Fiat confirmed that it would buy the United Auto Workers' 41.5% stake in Chrysler and create a new company called Fiat Chrysler Automobiles.

The potential upside is quite large, as the new company will allow Fiat and Chrysler to more closely share costs and pursue global expansion. Additionally, it will give Fiat greater exposure to the U.S. auto market, which is currently doing better than the European one. Fiat Chrysler also plans to have a listing on the New York Stock Exchange, boosting its appeal with large fund investors that typically avoid over-the-counter stocks.

But this integration is not without risks. Shares of Fiat fell more than 10% on May 7 after an earnings miss and some increased skepticism of execution on the integration plan. Additionally, Fiat has taken on a debt load expected to peak at $11 billion next year, part of it stemming from the cost of purchasing the UAW's Chrysler stake. Some analysts have suggested that Fiat may need to raise new capital, which would lead to potential share dilution.

Chrysler has also proved a difficult merger partner in the past. In 1998, Daimler AG (NASDAQOTH:DDAIF) merged with Chrysler, with Daimler paying $38 billion for Chrysler. Less than 10 years later, Daimler sold an 80.1% stake in Chrysler to Cerberus Capital Management for only $7.4 billion and agreed to pump additional money into Chrysler.

While Fiat will face some of the same challenges, the Fiat-Chrysler merger carries a few advantages over the Daimler-Chrysler one. By reorganizing, the new Chrysler has been able to trim many legacy issues that made gains under Daimler more difficult. Fiat also benefits from great flexibility in sharing parts. While Chrysler parts would often cheapen a Mercedes-Benz, they would be on par with vehicles of Fiat's price level. Additionally, the small-car focus at Fiat should help Chrysler to build more competitive offerings in the economy and compact segments.

Ready to compete
The success of Fiat Chrysler Automobiles will depend on the strength of automotive markets and how well the company can live up to its integration plans. For the past few years, Chrysler has been under Fiat's influence but has not been able to more fully integrate operations. Now, with Fiat Chrysler Automobiles ready to become one company, investors can begin to see whether Fiat's goals can be met.

For automotive investors comfortable with some integration risk, it is definitely worth kicking the tires on Fiat.

Alexander MacLennan and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.