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Will Sergio Marchionne Force a Merger With General Motors?

By John Rosevear - Sep 15, 2015 at 8:21AM

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The blunt and unorthodox CEO has already surprised Wall Street by making the merger of Fiat and Chrysler work. Will he pull off a merger of FCA with General Motors next?

Fiat Chrysler CEO Sergio Marchionne seems intent on a merger with GM. But GM isn't interested. Can he force the issue? Source: Fiat Chrysler Automobiles.

Fiat Chrysler (FCAU) CEO Sergio Marchionne seems convinced of -- or perhaps obsessed with -- two ideas:

The first idea makes a lot of sense. As for the second, there are some good reasons why GM isn't interested -- but Marchionne may be gearing up to force the issue.

GM's cash and technology could help fix FCA ...
It's clear why Marchionne might want to merge FCA with General Motors. For starters, while FCA is the only major automaker with more debt than cash, GM has minimal debt and over $20 billion in cash on hand. 

But that's far from the only reason. GM has a massive, well-established presence in China, while FCA is just getting started in the world's largest auto market. FCA lags most rivals in the development of hybrids and electric cars, while GM is well along. FCA struggles to generate decent margins in North America, while GM's have been over 10% recently. 

The list could go on and on. GM could bring a lot to FCA. But so far, Marchionne hasn't explained what FCA would bring to General Motors.

While GM is underperforming its two largest global peers in terms of profitability, it's a strong, healthy, solidly profitable company with the scale to stand on its own long-term. And CEO Mary Barra has a well-thought-out plan to make GM as profitable as its peers over the next several years. 

That plan is probably the biggest reason why Barra doesn't want to discuss a merger with Marchionne: It would be an enormous distraction.

... but what would GM get, other than a headache?
Marchionne's chief complaint about the auto industry is that wastes capital. By duplicating expensive efforts to develop essentially interchangeable components (small four-cylinder engines, for instance), much time and money is wasted. The result, as he sees it, is that cars are more expensive than they need to be, and automakers' profit margins are too thin for comfort.

His arguments are hard to refute -- when looking at the industry as a whole. It could also be applied to GM. But what Barra and her team are working on is eliminating exactly that kind of waste.

GM executives like Barra, president Dan Ammann, and global product chief Mark Reuss talk a lot about bringing discipline to the company's global capital allocation. A presentation that Ammann gave last fall walked through GM's global strategy for the next few years, explaining -- in convincing detail -- why it was emphasizing some market segments and areas of the world over others: Profitability.

Old GM management teams talked about market share and cost controls. Barra and her lieutenants talk about return on invested capital and operating margins. It's exactly the kind of discipline GM has needed for decades.

A forced merger with FCA would throw Barra's plan -- and GM's hard-won discipline -- right out the window.

Marchionne might really try to make a merger happen
As unlikely as it sounds, if Marchionne decides to force the issue, he has a couple of things going for him. First and foremost, he has already promised the United Auto Workers that a GM-FCA merger wouldn't eliminate any U.S. manufacturing jobs.

That's hard to believe: Where would the promised huge savings come from, if not from consolidating factories? But Marchionne may have a convincing answer to that objection. If he does, that removes a powerful potential opponent to the deal. In fact, the union might even back the deal, in hopes that the combined company would have fatter profit margins (and thus be able to pay better wages).

I think it's likely that Marchionne will give it a try. But not right away: FCA needs to complete the initial public offering of subsidiary Ferrari before it can go to war with General Motors. That won't happen for another few months. 

In fact, it's even possible that the proceeds from the Ferrari IPO will help fund the effort to force a merger with GM. Stay tuned.

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