Mega-Size Me: Marchionne’s Merger Mania Examined – Again

Where Driven to Write leads, the mainstream press follow: Autocar finally gets around to examining the Marchionne plan. 

Don't panic, there's a high percentage wool mix in this jersey. After all, a man's got to have standards.
Don’t panic, there’s a high percentage wool mix in this jersey. After all, a man’s got to have standards…

Quis custodiet ipsos custodes. Recently, one of our readers took us to task over our coverage of FCA’s latest product plans, suggesting we were being unduly negative about them and about FCA’s knitwear enthusiast-in-chief. It’s easy to see why, but at least we have been applying our critical faculties to the subject – something that has (up to now) been conspicuously absent in the mainstream automotive media.

Last week however, Autocar’s Hilton Holloway wrote a piece assessing Marchionne’s plans for a vastly smaller, yet simultaneously larger auto industry. In it, Holloway acknowledges the FCA chief’s highlighting of the massive technological overlap that exists amongst mainstream manufacturers, yet scarcely challenges his espousal of mergers and acquisitions. This raises a question: we understand the level of R&D spend is becoming unsustainable, but are mega-mergers the only means of alleviating it?

We also know Sergio has sat down with his spreadsheets and the numbers attributed to a merger with General Motors appear compelling. But knowing you can do something doesn’t automatically mean you should. There are as many reasons to avoid such a coming together as there are to enact one. Despite Marchionne’s claims to the contrary, the complications would be as vast as the attrition is likely to be. Remember too, FCA came into being on the back of a failed series of mergers, which leads one to wonder why Sergio thinks it will be different this time. The unavoidable inference being that while mega-mergers are not necessarily in the motor industry’s best interest, they most certainly are in his.

Another point missing from this and other assessments lie with future developments within the industry itself. Yes, manufacturers spend billions on drivetrain and powerplant development, but manufacturers are currently ramping up the level of co-operation well beyond engines and drivetrains into body structures and actual car lines; to say nothing of the increasing importance of the supplier base. A huge increase in the level of strategic component sharing by rival manufacturers will occur simply because it makes commercial sense to do so – and tellingly, it won’t require mega-mergers to implement.

Furthermore, as internal combustion engines become increasingly sidelined in favour of alternative modes of propulsion, the idea of manufacturers not sharing powertrain technology will become laughable. And this isn’t some distant dystopian future we’re talking about either. It’s already happening – and tellingly, it doesn’t require mega-mergers to implement.

Nonetheless, I believe Sergio Marchionne has the toughest job in the motor industry right now. The task of righting FCA is proving far more difficult than even he could have imagined and with few options left, he’s having to go all in. This putative mega-merger with General Motors clearly isn’t a template for the salvation of the wider industry, but it does represent a plausible way out for FCA. Without it, he says the group will survive – ‘in stagnation’. Marchionne has achieved a great deal with very little and while results have been patchy at best, both he and FCA are defiantly still here. So it’s entirely feasible he’ll force his way into GM’s boardroom, but what then? And should his ‘go-large’ strategy hit the buffers, what other troy will be left for him to burn?

Author: Eóin Doyle

Founding Editor. Content Provider.

9 thoughts on “Mega-Size Me: Marchionne’s Merger Mania Examined – Again”

  1. It´s not very clear to me (I´m not a finance guy) how company A can compel company B to merge other than for A to buy a lot of Bs shares. If A has all that cash, it would be best to spend it on great new products instead of on bits of paper.
    Spefically, in FCA and GM merging to make FCAGM I can see two drunk people relying on each other for support. GM is still the same old lumbering behemoth it has been for decades. Can FCA really hope to get into bed with that monster and not get crushed?

    1. From my understanding of what Marchionne has been telling the press, the same investors he’s trying to woo have significant investments in GM. The thinking appears to be that if they can be made to accept the veracity of Sergio’s claims, they will apply pressure upon Ms. Barra and the GM board to accept his merger proposal. It’s basically hostile, but Marchionne prefers to call it a ‘hug’. The creep.

  2. That won’t end well. Two dysfunctional firms trying to combine their management systems is going to cause a huge headache. Lots of people will lose morale inside the companies. I can see a lot of good Opel engineers quitting and that’s a serious problem for GM since Opel is Buick in China and the US. GM gains nothing out of this but also Fiat will be wasting effort that could be spent reviving Fiat cars and broadening Alfa’s range.

  3. If only we could look one or two years into the future. For the time being, the question is what we should think or believe in this game of poker. A FCA-GM ‘hostile takeover’ can be interesting IF managed properly.

    But since the main goal seems to be to reduce spending on powertrain/platform R&D, maybe some formula like the Renaut-Nissan alliance might work better. Howerever, it seems this option is impossible because GM says no.

    Which brings us back to the hostile takeover, which in the case of FCA-GM is an incredible challenge. Marchionne has promoted the possibilities and advantages very loud and clear. His last words (the ‘hugging’ remarks that he made) have even alluded to a takeover:

    “From wikipedia: Bear hug – It is used in takeover situations. It is an indication to the board of a target company that an offer of takeover is under consideration. A strong bear hug is a formal notice to the target company of an intended takeover. (…)”

    My scenario is this:

    GM shareholders can at some point be tempted to support Marchionne and his plan instead of GM Barra’s plan and steer/force GM in the direction of FCA.

    If this happens, the GM management will have to resign – or become hypocrite “We have reviewed new evidence which caused the management to change opinion… hum …The new strategy will allow GM to prosper thanks to a collaboration with FCA”. In either case, Marchionne can push his plan with support from GM shareholders and make maybe a Renault-Nissan like alliance between FCA and GM. I don’t think a complete merger would be in the interest of GM and FCA, but sharing of platforms and technology can be a good thing.

    All of this is very hypothetical. God knows what is really happening. Imagine FCA suddenly announcing a merger with Ford at some point… why not?

    1. My point is that all of this can be achieved by a loose alliance. No mergers required. One wonders if serial deal-maker Marchionne just wants one last humongous feather in his cap before he retires to shot peasants with Ferdi Piech. (Pheasants aren’t nearly satisfying enough).

      Perhaps as ‘your reader from Torino’ points out, its all part of a plan which ends with exactly that, which all sides can then reluctantly agree is best for all parties.

      I’d be interested in how all of this is being covered in Italy, because I struggle to find much useful analysis in this neck of the woods. Perhaps you can enlighten us?

    2. From what I have seen, the general press and population in Italy is more focused on the emotional stories:
      About a normal 21st century business practice: “oh no they registered FCA on the London stock exchange!” “national disgrace!”
      About Lancia “Marchionne killed Lancia” (I personally believe the terrible cars/workforce from the 80s and 90s did more harm to Lancia than Marchionne).
      About the new Alfa: “A copy of a BMW/Audi” My reply: why not? Half of the ‘patriotic’ Italians seem to drive a BMW/Audi now, so Marchionne gave them exactly what they want!

  4. I’m left wondering what effect all this talk of mergers and consolidation is having on FCA workforce morale. It might be appealing to investors or the finance sector to hear talk of improved return on investment and more efficient use of capital through consolidation but I don’t see how it would inspire an engineer or production line worker to rally to the cause of their under-resourced company.

    1. Under resourced company? The last few years, they have facelifted many places.

      http://fcamelfiplant.fiat.com/
      http://www.chrysler.com/en/200/factory-tour/#

      They also made some nice offices for about 1500 people in the old Mirafiori factory: http://www.fcagroup.com/it-IT/sustainability/sustainability_stories/Pages/officina_82.aspx

      I’ve seen worse from companies that are more ‘premium’ and have many more resources. At the same time, probably at FCA there are still many places that are better hidden from cameras.

    2. I had a feeling I was leaving myself open to challenge with the term ‘under-resourced’ but I was in a hurry. I probably should have said ’embattled’ or ‘struggling’ instead.

      You make valid points. Even as I was trying to finish my earlier comment I was reminded that life must be pretty good at Ferrari, and I remember the Maserati HQ building in Modena looking very impressive from the street when I was doing my supercar valley pilgrimage back in 2010. But are things as happy over in Michigan?

      Anyway, the point I was trying to make is that the ongoing investor/merger talk must be somewhat dispiriting if you’re trying to energise your team to spin a few more years out of the 500, a few more sales out of the Punto, Mito or 200, a few more g/km off the diesel V6 emissions, a few more mpg out of the Ram 1500 or a few less defects out of the Wrangler production line.

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