Why Volkswagen Might Still Devour Fiat Chrysler

Why would a VW-FCA matchup make sense? Here's one reason: VW needs SUVs, and Jeep's are among the best. Source: Fiat Chrysler

Is Volkswagen (VWAGY -0.85%) really looking to buy Fiat Chrysler (NASDAQOTH: FIATY) after all?

All parties have denied that merger talks are happening. But it's the rumor that won't quite die: Analysts all over the world continue to ponder the possibilities of a deal that really would transform the global automotive landscape. And tantalizing hints keep surfacing that suggest that there might -- might -- be more going on than the parties are currently willing to acknowledge.

So what's the scoop? In this video, Motley Fool senior auto analyst John Rosevear looks at the latest details to emerge this past week, details that suggest -- once again -- that there might be something to these rumors after all.

A transcript of the video is below.

John Rosevear: Hey Fools, it's John Rosevear, senior auto specialist for Fool.com. All parties have officially denied that there are merger talks going on between the Volkswagen Group and Fiat Chrysler Automobiles, but that hasn't stopped the speculation in the world's financial media that there might actually be a deal in the cards. That speculation has been given a boost by reports that hint that those denials might not be iron clad.

Trade publication Automotive News reported this past Monday that an insider told them that VW chairman Ferdinand Piech, and I quote, "has a grand plan that goes beyond his success in building Europe's No. 1 automaker. He envisions a global giant second to none and wants to revive the fabled German brand Auto Union as the name of the holding company."

Piech is the grandson of Ferdinand Porsche, who was a founder of both VW and Porsche, and reports have suggested that he approached the Agnelli and Elkann families, which control Fiat Chrysler, about selling their controlling stake to VW, and the idea is that this is one great automotive family approaching another about joining forces.

Now, if it's true that Piech has this grand vision, well, he's 77 years old, so he's not likely to be willing to wait a long time to see this happen. And this deal makes a lot of sense. VW is very weak in the mass market in the US, the company has been losing market share for a couple of years now in part because they don't have competitive trucks or SUVs, but if they acquire the Jeep and Ram brands, suddenly that changes.

In fact, if you look at total U.S. sales in the first half of 2014, Fiat Chrysler's sales plus VW Group's sales added together would be good enough for second place in the U.S., ahead of Ford (F 0.38%) and behind only General Motors (GM 0.38%). And FCA's Alfa Romeo brand, which is in the process of developing a whole range of new products, could make a nice complement to Audi and Porsche, in fact VW has approached Fiat in the past about buying Alfa Romeo.

There's a lot to FCA that Volkswagen might not want, like the Fiat brand's big operations in Latin America and so forth, but maybe those could be sold to a Chinese automaker looking to expand overseas. Or maybe VW could absorb them and try to run them more profitably. Fiat has traditionally been better at making money at the very low end of the market than VW has and maybe VW could get some help there. And of course, VW would instantly realize its long-held goal of selling more vehicles around the world than anyone else, they'd blow right past GM and Toyota (TM -0.17%) in global sales.

But there are big risks, too. FCA CEO Sergio Marchionne has done a masterful job of integrating Fiat and Chrysler, but most mergers don't go nearly that well, and maybe the biggest risk is that VW wouldn't be able to integrate the Fiat and Chrysler brands into its global operation in a profitable way without damaging them, without undermining the products.

And there's national pride here to worry about, how would Fiat's Italian unions react to a German takeover? And of course there are antitrust concerns in Europe and the U.S. and in other markets like Brazil, where Fiat and VW are the two big players in that market and regulators might have some big objections to a merger. So lots to think about here, and despite the denials the smoke continues to rise, so that has everyone thinking there might just be a fire here after all. We'll keep you posted. Thanks for watching.