Merger speculation is to Fiat Chrysler Automobiles as cold is to winter or, to keep with the automotive analogies, publicity is to Tesla.
For years now, FCA has been the ultimate automotive matchmaker fantasy.
The rumored or suggested suitors in recent weeks have had significant European pedigrees, but past merger talk for FCA has also focused heavily on Asia.
Early last year, as journalists descended on Detroit for the 2018 North American International Auto Show, the Free Press asked a question, which highlighted the assumptions about FCA’s needs — “Is Fiat Chrysler’s future Chinese ownership?”
FCA’s legendary CEO Sergio Marchionne, who died unexpectedly last summer, sounded definitive in his denial at a news conference later that week.
But the question did not come in a vacuum.
The focus on a potential Chinese acquisition of the entire company or a key brand such as Jeep had followed sometimes-intense reporting over previous months listing several possible interested firms, including Great Wall and Volvo-owner Geely. Even then, the U.S. political ramifications of a deal involving such an iconic American brand as Jeep and a Chinese entity would have been a challenge, and that has not changed.
The truth is merger and acquisition speculation about the Italian-American automaker never really ends.
In recent weeks, the flavors of the day have been PSA Groupe, which owns France’s Peugeot, and even Renault-Nissan, which would seem to have more than enough drama dealing with the fallout from the ouster of leader Carlos Ghosn over alleged financial misdeeds, which he has denied. Looking back, it’s almost easier to count the number of companies that have not been linked as possible candidates to merge with or acquire FCA than to name those not on the set of the automotive world’s version of “The Bachelor.”
It’s an interesting time to weigh the likelihood that the Detroit Three’s international representative might change ownership, tie up with someone else or sell off its pieces, but certainty on this seems as difficult to achieve as ever.
FCA board Chair John Elkann last week issued a letter to shareholders of Exor, the holding company for the Fiat founding Agnelli family and the power behind FCA, stressing what appears to be continuity.
“Our permanence in the capital of FCA has given its successive leadership teams the latitude to plan for the long term rather than having to react to daily pressures. This has made courageous and original decisions possible that have also respected the enduring interests of all our stakeholders. This approach and mind-set remain as relevant to us today as ever and our commitment to FCA and to participating in its bold and profitable future is also unchanged,” wrote Elkann, who is also chair and CEO of Exor.
Those comments followed a flurry of news stories during the Geneva Auto Show about a possible tie-up between PSA Groupe and FCA.
FCA’s leadership has expressed an openness to the idea of some type of tie-up for years. Former CEO Marchionne even took the unusual step in 2015 of making a case for industry consolidation.
Marchionne’s “Confessions of a Capital Junkie” decried the industry’s duplicative research and development expenses and highlighted the costs of bringing transformational technologies — robot cars and electrification, for example — to market.
Consolidation carries executional risks, Marchionne acknowledged, but he said the benefits are too large to ignore.
Marchionne even engaged publicly on specific merger or acquisition possibilities, such as General Motors and Volkswagen. VW has since formed a limited alliance with Ford and broader talks continue, perhaps confirming Marchionne’s foresight.
Interestingly, “Confessions” noted that its purpose was neither to put FCA up for sale or a matter of life or death for the company.
More recently, Marchionne and his successor, Mike Manley, have said they remain open to arrangements that make sense, but the company can stand on its own. The company, for example, is currently working to finalize the $7 billion sale of its components business Magneti Marelli to Japan’s Calsonic Kansei.
Unlike its crosstown Detroit rivals, FCA has also been more willing to partner with other entities on developing those transformational technologies. FCA has partnerships with Waymo as well as BMW, Intel and Mobileye related to autonomous vehicles. That kind of approach could limit the kind of risk that other companies face in going it alone on technologies that might take longer to bear fruit than is often hyped.
“You can destroy a lot of value by chasing your tail in autonomous driving,” Marchionne said in 2017.
Much of the confidence in FCA’s stand-alone potential comes from the dramatic turnaround at the company, which has not only been profitable and overcome its debt problem but has also been gaining market share at what appears to be the expense of GM and Ford. FCA’s position has improved dramatically since Chrysler emerged from bankruptcy, with a U.S. market share in 2018 of 12.9 percent (up from 9 percent in 2009), compared with 17.2 percent for GM and 14 percent for Ford, which have seen their respective market shares decline over the last decade, according to IHS Markit.
Would PSA, which boosted its European footprint by purchasing Opel and Vauxhall from GM in 2017, make a good partner for FCA? The idea has received mixed reviews.
Morgan Stanley said in a research note late last month that “both companies are seen as relative laggards in key technological domains such as (electric vehicles and robot cars), which symbolize a significant call on the future cash flows of both companies without an immediate or even medium-term payback.” It also highlighted the political hurdles in Europe likely to arise from job cuts caused by consolidation, while noting that PSA CEO Carlos Tavares “has experience with the political and labor issues that accompany mass consolidation.”
The research note also pointed out that FCA generated margins of almost 9 percent in North America last year:
“It seems unlikely to get any better than this. Can you blame them for looking at potential merger partners? On the other side … would PSA, or anyone else, want to pay up for exposure to the U.S. market at a potential peak?”
It should be noted, however, that FCA’s robust dealership network could provide options for PSA, which wants to return Peugeot to the U.S. market in coming years.
But a full PSA/FCA merger might not be at hand. Reuters reported last week that PSA CEO Tavares said his company is “not targeting a specific” automaker for an alliance. The companies, by the way, already partner on van production in Italy.
Of course, PSA is just one of the recent names to be connected to FCA. A tie-up with a merged Renault-Nissan, which also includes Mitsubishi, would create an automaker of immense scale. The aforementioned drama with Ghosn raises doubts about the entity’s direction.
Sam Fiorani, vice president of global vehicle forecasting for AutoForecast Solutions, however, sees both PSA and Renault-Nissan as good potential fits.
“South America is the one obvious overlap between FCA and either potential partner, but elsewhere … they would form a powerful team. Renault and Peugeot-Citroen-Opel control Europe much more completely than Fiat/Lancia. Renault-Nissan’s global reach and strength outpaces that of Groupe PSA, but either suitor would make (an) excellent partner for FCA,” Fiorani said. “FCA has just a few strong points and many weak areas. Globally, Jeep is the obvious highlight of the FCA family. Ram and the minivans are strong in North America while Fiat holds down South America and Italy.”
History and control, however, make any deal challenging to accomplish, Fiorani said.
“The Agnelli family’s history with Fiat goes all the way back to the founding of the company. They are very leery about giving up control, which makes joint-ventures where they are not the lead difficult to imagine,” Fiorani said.
Jon Gabrielsen, a market analyst and auto adviser, has been bullish on FCA and is not keen on an alliance with either PSA or Renault-Nissan.
“Peugeot doubles down on exposure in permanently stagnated Europe due to aging demographics running a few decades ahead of the U.S. Of course, Peugeot would get not only a meaningful presence in North America but also the prize and rapidly gaining Jeep and Ram brands. And the Renault-Nissan internal upheaval and the notion of combining three companies seems like a recipe for disaster and disappointment,” Gabrielsen said.
David Kudla, CEO and chief investment strategist for Mainstay Capital Management, thinks a Chinese automaker, such as Geely, makes more sense.
“That’s the relationship that works both ways. That would give an Asian automaker access, a footprint and a dealer network in the U.S., and Fiat Chrysler, which is behind GM, Ford and VW in Asia, it could give them a leap forward, particularly in China,” Kudla said.
FCA does have a joint venture in China with Guangzhou Automobile Group, or GAC, which has made recent appearances at the North American International Auto Show in Detroit and has emphasized its desire to enter the U.S. market.
Kudla, however, is not sold on the need for FCA to tie up with anyone.