General Motors’ (GM, Financial) chief executive Mary Barra has dismissed calls from its crosstown rival Fiat Chrysler Automobiles (FCAU, Financial) regarding a merger. General Motors is the world’s third-largest automaker in terms of sales volume. According to people close to the matter, Fiat Chrysler Automobiles’ chief executive Sergio Marchionne is talking with hedge funds and other prospective associates to push General Motors in favor of a merger with the company. Here’s a look at why General Motors is not interested in a merger with Fiat Chrysler and an update on what’s going around.
GM not interested
In the annual general meeting with the company’s shareholders, Mary Barra told that the company had got a letter from the top brass of Fiat Chrysler Automobiles. The letter advocated that the two automaker should set up a meeting to deliberate a prospective deal in view of creating a new top player in the auto industry.
Barra said. “We did receive a letter from FCA that was thoroughly vetted by management and the board, and a decision was made…we have scale. If you look at our track record, we’ve had for the last four years margin improvement and we’re showing steady improvement on our goals to 2016…and then returning all available free cash flow to shareholders.”
Focused on the target
General Motors is presently focused on achieving its goal. The automaker is around a decade into an internal realignments, which according to executives have saved billions of dollars in costs and facilitated the company in boosting return on invested capital.
The company management has consistently held on to its goals and stayed away from any distractions. As such, General Motors continues to resist Fiat Chrysler’s recent appeals and isn’t entertaining any further talks. The Detroit automaker has a much bigger scale and over the years has upgraded its portfolio to match international vehicle architectures. This has helped the company minimize duplication and has simultaneously bolstered manufacturing efficiency.
Also, a combination with Fiat Chrysler doesn’t appear very attractive to General Motors, given the former’s feeble operating margins along with heavy debt burden. As a case in point, in the first quarter this year Fiat Chrysler’s North American operating margin of 3.7% was half of General Motors’ margin in the same period. Barra thinks that the decision is “acting in the best interest of the GM shareholders.”
In addition, General Motors has had a bitter experience with Fiat and its boss Sergio Marchionne in the past. Exactly a decade ago the American company had to pay a sum of $2 billion as compensation to move out of a bad deal of acquiring Fiat’s struggling business. This also resulted in the termination of a five year old association of conjointly manufacturing engines and transmissions to lower costs and gain efficiency.
General Motors has already declared a massive dividend plan and has been thinking of other ways to use the surplus cash in further rewarding its investors. However, Marchionne believes that General Motors could use its liquidity better by putting it on enhancing scale instead of share buyback programs.
Fiat desperate to merge with an automaker
Marchionne is very keen on joining forces with an auto player. In the pursuit of merging with an entity is reaching out to outside investors who could help in looking for a partner for the Italian-American automaker. Fiat registered $108 billion in revenue in the last fiscal year. Fiat Chryler’s weak operating margins could get better if the company can manage a consolidation and save billions in cost through synergies from combination.
Last thought
Marchionne is unlikely to get sufficient backing from General Motors’ shareholders as they would prefer the company spend its cash on share buybacks than in such merger deals. A lot will be conditioned on General Motors’ operational improvement. The company is on track to accomplish its goals in 2016. It confirmed to attain a 10% operating margin in North America and reach a break-even point in the ailing European market. General Motors is expected to break its own record by selling over 10 million vehicles this year. As said by the management, the company wouldn’t want other diversions on its way.
