Top American automaker General Motors (GM, Financial) turned down the merger proposal by Fiat-Chrysler Automobiles (FCAU, Financial). Fiat-Chrysler’s primary motive behind this blockbuster merger was to slash costs, according to the media reports. Indeed, the proposed merger would have led to the evolution of a supreme automotive giant and consequently cut billions of dollars in cost. Let’s see why Fiat-Chrysler is so keen on joining forces with the automaker.
Eyeing GM for synergies
A couple of months ago, Fiat-Chrysler’s CEO Sergio Marchionne had expressed the company’s interest in combining with the top Detroit player through an email sent to General Motors' CEO Mary Barra. However, this idea failed to impress Mary Barra and other executives, as reported by the New York Times. In fact, Marchionne’s request for a meeting was also emphatically turned down.
Marchionne was the key person behind the union between Fiat and Chrysler. His proposals aren’t generally dismissed. As per Reuters’ reports, Marchionne’s demand for a merger was primarily aimed at strengthening the company’s US operations and lessening its weaknesses to make Fiat stronger before he steps down from his office in 2019. The company believes that merging with a global player would bring immense synergies and be a win-win situation for both companies.
Barra had never met Marchionne and therefore she would not treat this first offer of a mega merger as accepted. She is currently more focused on investment in product development and is proceeding with her plans.
Fiat’s greater ambitions
Fiat’s endeavor to emerge as a tough player doesn’t end with a merger proposal with General Motors. The company is working with tech giants such as Google (GOOG, Financial) and Apple (AAPL, Financial). Marchionne paid a three-day visit to California to meet executives including Apple’s CEO Tim Cook. He emphasised on developing a healthy relationship with tech giants. Both Apple and Google are increasing their focus in the auto space and are presently speculated to be involved in developing their own cars. The tech behemoths shall have to team up with the auto biggies for manufacturing and promotion in future.
GM produces higher profits as compared to FCA. GM registered earnings of 86 cents per share in the first quarter of the year which is much higher as compared to 29 cents per share in the first quarter of 2014. In contrast, FCA’s profit in the first quarter of 2015 was 6 cents per share against a loss of 18 cents per share a year ago. Moreover, General Motors has a stronger presence in the global market. Had the company accepted Fiat’s proposal, the latter’s exposure to the global market would have improved.
Marchionne wants to improve and consolidate his business. This is precisely why he desires to combine with another automaker to emerge as one big powerhouse. However, his sense in using the word ‘consolidate’ is different. He wants to do away with the wastes from two big businesses and run it smoothly and effectively with combined efficiencies. Marchionne explains FCA’s strategic idea in these words:
“I think it is absolutely clear that the amount of capital waste that’s going on in this industry is something that certainly requires remedy…A remedy in our view is through consolidation."
However, Fiat-Chrysler already holds brands such as Dodge, Ram, Jeep, and Chrysler in the U.S. In the international market, Fiat-Chrysler owns Maserati, Fiat, Ferrari, Alfa-Romeo, and Lancia. Considering this, a merger with General Motors could turn out to become a big threat to its contemporaries.
Last word
It’s hard to say how fruitful the proposal would be particularly with General Motors disinterest in the offer. The combination of two big entities could bear an impact on the competitive environment of the automotive industry. It will be very interesting to track Fiat-Chrysler’s move going forward, particularly after sensing that the seventh largest global automaker is on a shopping spree.
