Merger and acquisition Essay
Merger and acquisition
A little more than two years ago, the White House’s auto industry task force concluded flatly that Chrysler was “not viable as a stand-alone company.” That may have been an understatement. America’s third-largest automaker was too dependent on gas-guzzling trucks and S.U.V.’s, too concentrated in recession-wracked North America, too small to compete globally and too cash-starved to invest in new technologies. Quality was abysmal. Every model in the company’s Chrysler, Dodge and Jeep brands ranked in the bottom 25 percent in the J. D. Power & Associates survey of customer satisfaction.
From 2006-8, Chrysler lost $30 billion. David Kelleher, 44, president of David Dodge Chrysler Jeep in Glen Mills, Pa., thought Chrysler — and his dealership — were “close to death.” After graduating from the University of Pennsylvania and forgoing law school to sell cars, Mr. Kelleher had worked his way through the ranks at a Chrysler Plymouth dealership in the Philadelphia area before buying his own franchise and opening David’s in 2005. Chrysler was already in steep decline under its German owner, Daimler-Benz, which in turn sold the company to the private equity concern Cerberus Capital Management in 2007.
“We were lucky to survive those barracudas,” Mr. Kelleher recalled. “They were systematically devaluing the company. They just wanted to squeeze money out of it.” As for quality, he mentioned the midsize Sebring. “That was a flagship piece of junk. I buried it on the back lot. I sold maybe one a month, if that.” When Chrysler’s owners on Wall Street demanded higher sales numbers, Mr. Kelleher and his fellow dealers responded with steep discounts and lower credit standards. “We were just trying to get the numbers up and we built a bubble,” he said. When gas prices soared above $4 a gallon in 2008, he pleaded with Cerberus officials for models with better gas mileage, long a sore spot for Chrysler.
“They looked at me like I was speaking French.” After President Bush bailed out General Motors and Chrysler in his administration’s waning days, there was sentiment inside the Obama White House and among some in Congress to sell off Jeep and a few other valuable Chrysler assets, possibly to G.M., and cut the government’s losses by liquidating the rest. Dealers like Mr. Kelleher would be reduced to selling used cars and surviving on repairs to defunct models. He recalled meeting at the Capitol with Arlen Specter, then the Republican senator from Pennsylvania. “David, why would I save this company?” he recalled Senator Specter asking.
“It makes bad cars. It’s destined to fail.” Mr. Kelleher said he replied: “I’m going to be bankrupt in a matter of weeks. I can’t support my debt service selling used cars. Millions of jobs are going to be lost.” By the end of the meeting, Mr. Specter seemed to be reconsidering. “If I vote for this, my party is going to turn against me,” he said to Mr. Kelleher.
“I hope you remember this.” (Mr. Specter said he didn’t remember the conversation, but “it sounds like one of many that I had with constituents where I voted on what was good public policy even though it was politically risky because the Republican Party didn’t like it.”) Mr. Specter was one of only two Republican senators to support the auto bailout. He subsequently switched parties and was defeated in the Democratic primary. Not even Mr. Kelleher could be sure the proposed rescue plan — a government-backed partnership with Fiat of Italy in which Fiat would pay no money for a controlling stake and an option to buy more — would work.
If a vaunted carmaker like Mercedes-Benz couldn’t save Chrysler, who could? In what surely ranks as one of the most remarkable turnarounds in the annals of American business history, this week Chrysler reported adjusted net income of $181 million and a 30 percent rise in revenue, to $13.7 billion, even in a still-soft global car market. Its June sales jumped 30 percent from the previous year, its 15th consecutive month of increases. Its market share has grown to 10.6 percent, from under 6 percent. Chrysler repaid its outstanding government loans in May, six years ahead of schedule, and last week Fiat paid $500 million for the Treasury’s remaining 6 percent stake in the company.
The American government has
recouped $11.2 billion of its $12.5 billion investment in Chrysler, and would probably have made a profit had it held the debt to maturity. Meanwhile, Chrysler employs 56,000 people and has added 9,000 jobs since the bailout. “This is an amazing success story,” the assistant secretary of the Treasury, Timothy Massad, told me this week. “We’ve fully exited Chrysler at a very small loss. When you look at the options we had, they were very stark: provide assistance or face the immediate liquidation of the company. That would have been disastrous in the context of the worst financial crisis since the Great Depression.”
How did Fiat do it after so many had failed? Mr. Kelleher said the first months were frightening. Fiat and Chrysler’s chief executive, Sergio Marchionne, “stopped the rebates, stopped the bad loans. We felt the change immediately.” Chrysler’s market share plunged. But Mr. Kelleher said he felt better after he met the new chief executive at Mr. Marchionne’s first dealer meeting in Orlando, Fla., in early 2010. A native of Abruzzo, Italy, whose family moved to Canada when he was 14, Mr. Marchionne speaks fluent English and Italian. “He has a presence. He looks like a kindly grandfather, but he has a grip that will take your hand off,” Mr. Kelleher said. Mr. Marchionne immediately put his stamp on new models. At the Orlando meeting, he reviewed plans for a revamped Sebring.
“I’m not going to allow you to sell this,” he bluntly told the dealers, according to Mr. Kelleher. The Jeep Grand Cherokee “was on the drawing board, but Marchionne changed the car dramatically. He knew it was a good product, but it wasn’t up to his standards,” especially the plastic-laden interior, Mr. Kelleher said. At its debut last fall, the revamped model drew strong reviews and was an immediate hit. New quality controls cut customer complaints in half from the previous model. “We started to take off right then,” Mr. Kelleher said. After the meeting, the Sebring got a new engine, a new suspension, a new transmission and a new interior.
About the only thing that survived was the chassis. It also got a new name, the Chrysler 200, and Mr. Marchionne made the bold but controversial decision, criticized by some Republicans in Congress, to spend $2 million for a commercial in January’s Super Bowl. The day of the game, Mr. Kelleher was attending a dealer convention in St. Louis, where dealers were clamoring for a glimpse of the ad. Chrysler leadership finally agreed on condition of confidentiality.
A few hours before kickoff, the dealers watched as a camera panned through the industrial ruins of Detroit to the ominous pulse of “Lose Yourself” by the rapper and native son, Eminem. “What does this city know about luxury?” a narrator asked. “What does a town that’s been to hell and back know about the finer things in life? Well, I’ll tell you: More than most.” The images shifted to a statue of the boxer, Joe Louis, Diego Rivera’s lush Detroit Industry mural, mansions from Detroit’s heyday. “It’s the hottest fires that make the hardest steel,” the narrator continued.
“Add hard work and conviction and the know-how that runs generations deep in every last one of us. That’s who we are. That’s our story.” Images flashed by celebrating Detroit and its people, with barely a glimpse of the new 200. Finally Eminem emerged from behind the wheel and walked into the beautifully renovated Fox Theater to the uplifting strains of a gospel choir onstage. At the end, letters appeared over the dark screen: “The Chrysler 200 has arrived. Imported from Detroit.” “I was stunned,” Mr. Kelleher recalled. “I looked around.
The room was silent. Some people were crying. Then the applause started and just rolled through the auditorium and kept on going. We felt a rebirth.” Mr. Kelleher immediately e-mailed his chief salesman. “Get on the computer right now and order 40 200s.” At Chrysler headquarters in Auburn Hills, Mich., lights in the executive offices were routinely burning far into the night. “I’d get e-mails at 4 a.m.,” said another Treasury official. Mr. Kelleher said Mr. Marchionne’s team “has an undying loyalty to him. I’ve never seen this at this level. These guys came in, they actually did what they said they would do, which is so refreshing.” Mr. Marchionne brought Fiat technology into 16 new models, saving Chrysler billions of dollars in research and development costs while sharply raising mileage standards. “The Fiat power train policy has changed my entire line,” Mr. Kelleher said. “I’m looking at a Chrysler 300. The one on my floor has average m.p.g. of 27.
The new one will have 30 m.p.g. in a luxury sedan.” Mr. Marchionne has brought a rejuvenated Fiat lineup back into American showrooms, starting with the tiny but stylish 500, with rumors of Fiat-owned Alfa-Romeos to follow. A Dodge version of the 500 is scheduled for this spring. No one is pretending that all Chrysler’s problems are behind it. American auto sales are still far below their precrisis peak, and the latest deadlocks in Washington haven’t done anything for consumer confidence. Over all, Chrysler quality still trailed in Consumer Reports influential auto survey in 2010, although the magazine subsequently called Chrysler’s pace of change under Fiat leadership “blistering” and its progress “laudable.”
This week three Dodge models earned top scores in J. D. Powers’s annual appeal survey to tie with BMW for the most awards. In Glen Mills, David’s re-energized workers are wearing navy T-shirts with the slogan “Imported from Detroit.” Mr. Kelleher sold all the 200s he ordered the day of the Super Bowl, plus another 60. “We’re doing terrific,” Mr. Kelleher told me this week. “Our dealerships are approaching the profitability of Toyota.” Last year, fellow Chrysler dealers elected him secretary of the dealers’ council, and he’s in line to be chairman next year. “It’s exciting to be part of this.”
Fiat Spa. and Chrysler LLC (backed by its majority stakeholder Cerberus Capital Management) today announced an alliance that will see the two automakers share vehicle platforms, distribution channels, and technology. Fiat will take a 35-percent stake in Chrysler, although no money will change hands, as Chrysler gives up a chunk of itself in return for viable future product development. (Chrysler’s been broke for long enough that virtually all meaningful product development has been halted for some time.) The current agreement is nonbinding but should become a finalized partnership by April, according to Chrysler.
Fiat Group includes the bread-and-butter brands of Fiat, Lancia, and Alfa Romeo, with luxury and performance marques Maserati and Ferrari perched at the top of the empire. We would expect most of any platform sharing to come courtesy of the lesser three Italian companies, although a rundown on the alliance by Chrysler chairman and CEO Bob Nardelli states that his company would have access to all but Ferrari’s bits and pieces. Would this open the door to a second coming of the legendary Chrysler TC by Maserati? Let’s hope not. Chrysler needs all the help it can get to once again become viable—and prove that it can stay that way—especially considering that the U.S. government and the American populace expect to be repaid for their recent $4 billion loan to the troubled automaker.
Indeed, Chrysler will likely need additional loans to continue its transformation. To that end, the Fiat/Chrysler partnership and its potential for leveraging global markets—thus strengthening both companies—could help convince lawmakers to approve further assistance. Did we see this specific partnership coming? In a word, no. Chrysler had been in talks with GM several months back, but those fell apart when both companies began to experience serious financial hardship. A strengthened Chrysler/Nissan/Renault alliance was also rumored. But should we have expected Fiat to make such a move? In an upcoming issue of Car and Driver, we quote Fiat CEO Sergio Marchionne as saying, “Independence in this business is no longer sustainable.” His prediction that only six global carmakers will still exist in two years is pretty telling. This new alliance is apparently his attempt at merging rather than dying.
What Does Chrysler Get?
Fiat will share with Chrysler its platforms and powertrain technology, including engines, transmissions, and fuel-saving tech. Today’s announcement specifically mentions city and compact vehicles, products Chrysler will need should American consumers actually decide to buy the small, fuel-efficient cars U.S. lawmakers claim they want. Chrysler will also get better distribution of its products, certainly in Europe, but also in places such as India—Fiat has a partnership with Tata Motors—and Brazil. Fiat also has a deal with Chery, the Chinese automaker with which Chrysler had been trying to partner. Both Chrysler and Fiat will also be able to better leverage their global supplier ties and therefore see cost savings in larger volume. What’s in it for Fiat?
For Fiat, the reward is simple: distribution channels. Currently, Fiat only sells Maserati and Ferrari in the U.S., although Alfa’s gorgeous 8C has been sold here in extremely limited numbers, as well. If Fiat wants to become a truly global entity, a foothold in North America would be most helpful. Alfa Romeo has been promising a proper return to the U.S. market for some time, and Chrysler’s distribution network could ease that brand’s return to our shores—perhaps even saving some Chrysler dealers from closing altogether—and could also serve as a point of sale for potential Fiat and Lancia imports, too. Fiat will also likely be able to use excess global production capacity to assemble Chrysler-badged variants of its products.
With worldwide auto sales slowing, that would help Fiat to continue manufacturing at pre-slowdown levels; Chrysler could potentially build Fiats in its plants, as well. A wrench in the works: Chrysler is still in a partnership with Nissan. One product of that hook-up is expected to be a Versa-based small car, possibly based on the Dodge Hornet concept. (That car was also rumored to have sprung from the potential Chrysler/Chery partnership.) We wonder how this new Italian-American deal might affect those already in place with Nissan, which include rebadging the new-for-2009 Dodge Ram as the replacement for the Titan.
It’s All About Synergies—and Other Buzzwords
Despite Fiat being on the financial ropes itself only a few years ago, Italy’s last remaining large car company has come fighting back like Rocky Balboa thanks in part to a $2-billion alimony payment from its annulled marriage with General Motors. Chrysler could do a lot worse when it comes to picking a dance partner for 21st century survival. Speculating further, here’s how a few Fiat products could make an impact. A caveat: most of Fiat’s vehicles weren’t designed with U.S. crash and emissions standards in mind (the 500 being an exception), so it’s possible that we’ll have to wait at least until the next generation of each of these cars arrives before they could be sold here.
Fiat Grande Punto: It wouldn’t be much of an exaggeration to say that the Grande Punto is the car that saved Fiat. At the time of its introduction back in 2005, the Italian auto giant was staggering after years of neglecting the small-car market, a segment which had made it such a powerhouse from the 1950s through the ‘70s. Handsome, well-built, and economical, the Grande Punto surprised the automotive world by being, well, so unlike the rust-prone wheezeboxes Fiat had peddled to European consumers for the previous two decades. Maybe it didn’t single-handedly save Fiat, but had the Grande Punto flopped, it could have destroyed the company.
Sized to compete with cars like the new Ford Focus and Honda Civic, this small Fiat would look nice rebadged as a Chrysler. Its range of economical gasoline-fired engines (from a feeble but fuel-sipping 64-hp, 1.2-liter four-banger to the tire-smoking, 178-hp four found in the sporty Abarth SS model) could earn Chrysler green-car cred, props from the sport-compact crowd, and a valuable slice of the small-car market. Fiat 500: Following the lead of other retro-themed small cars like the Volkswagen Beetle and BMW’sMini, Fiat mined its rich small-car history to create this thoroughly modern update of an automotive icon.
Stylistic inspiration came from the original 500 that was produced from 1957 to 1975. That 500 managed to be cool, cheap, and—when tuned for performance—a giant-killer on road and racetrack alike. Today, the new Fiat 500 makes an urban-hip car like the Mini Cooper suddenly look as conformist as a beige Corolla. Under the 500’s chic-looking shape is the front-drive platform of the current Fiat Panda and the new Ford Ka.
A wide range of water-cooled engines are found under the 500’s stubby nose, including a 69-hp, 1.2-liter gasoline engine and a frugal, 75-hp, 1.3-liter turbo-diesel. If the 500 were to come to the U.S., bet on something a bit more powerful stuffed under the hood, like the optional 100-hp, 1.4-liter 16-valve gas-powered four-cylinder. A 158-hp four-cylinder is offered in the sporty 500 Abarth model. In terms of sales, the 500 has been a home run for Fiat in Europe. Not only has the car sold remarkably well, customers are loading the car with pricey options, which allows Fiat to score maximum profit out of a small runabout. The 500 could spearhead Fiat’s reentry into the U.S. market and/or Chrysler could snag the rights to build an equally quirky, sexy small car based on the little Italian’s mechanicals. Chrysler owns the rights to the Gremlin name, right?
Fiat Bravo: This is probably as far as the Chrysler/Fiat link dare go up the automotive food chain, at least in the U.S. market. The C-segment is filled with heady competition, not least of which is the bestselling car in Europe, the Volkswagen Golf (currently Rabbit in North America). Fiat has routinely sputtered and stalled when it came to building larger cars in the past. Yet the new Bravo is proof that the Italian manufacturer is ready to take on mainstream rivals in such a volume area. Stylish and refined, the Bravo is filled with high-tech features, and a high-end Chrysler hatchback or sedan based on it might not be so far-fetched.
On January 20, 2009, the Italian Fiat S.p.A. and Chrysler LLC announced that they have a non-binding term sheet to form a global alliance. Under the terms of the potential agreement, Fiat could take a 35% stake in Chrysler and gain access to its North American dealer network in exchange for providing Chrysler with the platform to build smaller, more fuel-efficient vehicles in the US and reciprocal access to Fiat’s global distribution network. By mid-April, as talks intensified between the two automakers to reach an agreement by a government-imposed deadline of April 30, Fiat’s initial stake was reported to be 20% with some influence on the structure of top management of the company.
However, Fiat has warned that the merger would not take place if Chrysler fails to reach an agreement with the UAW and the Canadian Auto Workers’ Union. On April 26, 2009, it appeared as if Chrysler had reached a deal with the unions which would meet federal requirements, though details were not made available. Chrysler said the union agreement “provides the framework needed to ensure manufacturing competitiveness and helps to meet the guidelines set forth by the U.S. Treasury Department.”
Chrysler filed for at the Federal Bankruptcy Court of the Southern District of New York, in Manhattan, on April 30, 2009, and announced an alliance with Both the White House and Chrysler expressed hope for a “surgical” bankruptcy lasting 30 to 60 days, with the result of reducing the company’s liabilities and post-bankruptcy emergence in stronger financial shape. The submitted court documents indicated that there would be a reorganization plan presented to the court in 120 days, on August 28, 2009. A White House official indicated that the government would provide for between $US 3 billion to $US 3.5 billion, and upon a completion of Chrysler bankruptcy restructuring and court proceedings, the company would be eligible to receive up to $US 4.5 billion in financing to resume operations, for total of $US 8 billion of government support.
Prior to the bankruptcy filing, Chrysler had received $US 4.5 billion in financing from the U.S. government, under a George W. Bush administration plan, in December 2008, after Congress declined to approve legislation to provide federal loans. Chrysler announced on the day of the bankruptcy filing, that during the restructuring, it would cease most manufacturing operations on May 4, 2009, and resume production “when the transaction is completed, which is anticipated within 30 to 60 days.” On May 1, 2009, Chrysler LLC filed for bankruptcy, and Lasorda stepped down as President and Vice-Chairman and retired, despite Fiat urging him to stay on. On May 14, 2009 Chrysler filed with the bankruptcy court to terminate the dealership agreements of 789, or about 25% of its dealerships.
On June 1, 2009 a US bankruptcy court approved a plan which spells out that the new Chrysler company called “Chrysler Group LLC”.The VEBA formed by the United Auto Workers Union to provide health care for Chrysler retirees will hold 55%. Minority stakes will be held by Fiat (20%) and the US (8%) and Canadian (2%) governments. Fiat has stated it plans to increase its share to 35% if Chrysler meets certain goals. On June 8, 2009, Supreme Court Associate Justice Ruth Bader Ginsburg, who is assigned to emergency motions arising from the United States Appeals Court for the Second Circuit, in a one-sentence order, stayed the orders of the bankruptcy judge allowing the sale, pending further order by Justice Ginsburg or the Supreme Court.
On June 9, 2009, the Supreme Court published its denial of the applications for a stay of the sale from the three Indiana funds, allowing the sale of assets to “New Chrysler” to proceed. According to the two page decision and order, the Indiana funds “have not carried the burden” of demonstrating that the Supreme Court needed to intervene. The U.S. Department of the Treasury issued a statement saying: “We are gratified that not a single court that reviewed this matter, including the U.S. Supreme, found any fault whatsoever with the handling of this matter by either Chrysler or the U.S. government.”
The proposed sale of assets is scheduled to close on Wednesday, June 10, 2009, when the money to finance the deal is wired by the government. Fiat will receive equity in the New Chrysler through its contribution of automobile platforms as a base for a new line of Chrysler cars. On June 10, 2009, 41 days after filing for bankruptcy protection, the sale of most of Chrysler assets to “New Chrysler”, formally known as Chrysler Group LLC, was completed. The federal government financed the deal with US$ 6.6 billion in financing, paid to the “Old Chrysler”, formally called Old Carco LLC. The transfer does not include eight manufacturing locations, nor many parcels of real estate, nor equipment leases. Contracts with 789 U.S. auto dealerships, who are being dropped, were not transferred.
Fiat will sell its own models – such as this Fiat Nuova 500 – through Chrysler in the United States Fiat will initially own a minority 20% stake of Chrysler Group LLC with the option of taking additional equity up to a 35% stake if certain operational and capitalization goals are achieved. The United Auto Workers’ union retiree health care trust fund (Volunteer Employee Benefit Association) will be the majority owner, with 55 percent when Fiat reaches its target holding of 35%. The U.S. and Canadian governments will initially hold minority stakes of 8% and 2%, respectively, of the new Chrysler.
On May 24, 2011, Fiat paid back $7.6 billion in U.S. and Canadian government loans. On July 21, Fiat bought the Chrysler shares held by the United States Treasury. With the purchase, Chrysler once again became foreign owned; this time Italian carmaker Fiat gained majority ownership and control of Chrysler.The United States government’s involvement in the Chrysler bankruptcy cost the U.S. taxpayer $1.3 billion. Chrysler Group
Lancia Delta to be marketed in the USA as the Chrysler Delta In early 2009, Chrysler Group, based in Auburn Hills, Michigan, became majority owned by the United Auto Workers Voluntary Employee Beneficiary Association trust. In June 2009 Fiat gained ownership of Chrysler Group as a part of Chrysler’s restructuring plan, and eventually gained 58% total stake in the company. Fiat stated plans for the Chrysler brand and Lancia to develop products, with some vehicles being shared. Olivier Francois, Lancia’s CEO, took over as CEO of the Chrysler division in October 2009.
Fiat has stated that, depending on the market, some Chrysler cars will be sold as Lancias and vice versa. Francois plans to reestablish the Chrysler brand as an upscale brand, a position somewhat muddied since the K-car era in the 80’s, and especially after the Plymouth brand was discontinued. At the 2010 Detroit Auto Show, A Chrysler badged Lancia Delta was on display, likely the first Lancia to be sold as a Chrysler and possibly as a replacement for the Cruiser. Dodge, Jeep, Chrysler get makeover by refreshing, redesigning or replacing every car and truck, swapping out engines and creating vehicles people want.
BRIEF HISTORY OF CHRYSLER
In the automotive and, more generally, in the industrial arena Fiat Group Automobiles (Fiat) and Chrysler Group LLC (Chrysler) can be considered two permanent case studies. In particular now that they are joining their trajectories. Both companies have gone through many crises in more than a century of existence.
In particular, Chrysler in the last fifteen years has been characterized by three acquisitions/mergers; each can be considered a good research field.
In 1998, the successful Chrysler entered into a partnership named a “merger of equals” with Daimler-Benz AG, one of the world’s most respected carmakers. From the beginning the Germans were the dominant force in the partnership and as a matter of fact the merger became an acquisition, but they were not able to integrate the two automotive visions in a single company (Gomes et al., 2010)
In 2007 Chrysler became the first carmaker controlled by private investors, Cerberus Capital Management, a deep-pocketed Wall Street private equity group, whereas the continued financial link to Daimler ensured the access to new technology. The new acquisition and arrangement seemed to propitiate several advantages (Belzowski, 2009) but the product strategy turned out to be a failure.
In 2009 the financial crisis found Chrysler at a re-structuring stage and Fiat was identified as the right partner to develop a product-sharing alliance. In comparison with the previous cases, the main difference is that “money” plays a smaller role. The ongoing merger/acquisition is based more on the barter of technologies from Fiat with Chrysler equities.
Mergers differ from acquisitions because they are the product of mutual consent between the companies and can imply an exchange of shares. Acquisitions involve taking over and they are often viewed as hostile, but, as in the case of Chrysler, they can be welcomed by at-risk companies in search of rescue from imminent bailout. There are different types of mergers and acquisitions: vertical, horizontal, lateral and conglomerate. Fiat-Chrysler falls within the second one since they are seeking to gain access to products and market segments, new or different technologies, skills and distribution channels in order to increase economies of scale, scope and competitive power.
Mergers and takeovers have not by any means proved a panacea for solving industrial problems as many fail to achieve the goals originally envisaged (Cartwright and Shoenberg, 2006). Often the expected gains from expected synergies fail to emerge. As Capron (1999), argues, it is probably easier to achieve synergies in marketing than in innovatory capabilities in manufacturing and production due to products being at different stages in the development cycles. Indeed it might take a long time for real synergies and benefits to emerge fully (Donnelly and Morris, 2003).
The merger-acquisition process is often neither simple nor straightforward and both in the pre-phase and in the post phase mainly depends on leadership of the two companies. The ultimate responsibility lies with the acquiring firm that has three choices: motivate the existing management team, bring in an entirely new team or create a new management team drawn from both firms. Whichever method is adopted it is essential that team members play complementary roles to achieve change whether this be in culture, behavioural patterns, human resource management practices, operating procedures and so forth (Begley and Donnelly, 2011). It is at this juncture that decisive leadership is essential, because as Prittchet, Robinson and Clarkson (1996) argue, failure in post merger strategy implementation often leads to stress and anxiety among the work force at each level.
2. Brief recent history of Fiat
FIAT AND GENERAL MOTORS:
The put option was part of a deal whereby Fiat sold 20% of Fiat Auto to GM for $2.4 billion, taking a 6% share of the American carmaker in return. On the other hand, the agreement with General Motors implied a put option for Fiat to sell the automotive assets after four years at fair market value. As a matter of fact Fiat managers and employees experienced a period of wavering and a sort of two-boss syndrome. In 2005, the acute crisis moved General Motors to disburse the implicit penalty and resolve the agreement. Fiat reached a $2bn (£1.1bn) settlement with General Motors in February to end its previous joint venture. GM wanted an end to a deal which could have forced it to expand its small stake in Fiat to outright ownership.
The closure of the agreement with General Motors made possible a number of limited alliances all over the world (Tata, Ford, Severstal1, Suzuki and Chrysler) and reinforced the assets in Brazil, Turkey and Poland. FIAT AND PREMIER:
Premier manufactured the Padmini at their Kurla plant in Bombay (now Mumbai) until they sold a majority stake to Fiat SpA in September 1997. From the mid 1980’s onward, with the advent of more modern, cheaper and more fuel-efficient cars from Maruti` Suzuki, the popularity of the Padmini slowly began to wane. The liberalization of the Indian economy in 1991, which allowed foreign car manufacturers to launch operations in India, began to sound the death knell for the Padmini. The Padmini was never able to compete with the more modern, value-for-money and fuel-efficient cars manufactured by Ford, GM, Daewoo, Honda and Hyundai.
In 1996, Premier tried to revive the sagging fortunes of thePadmini by introducing bucket seats, a floor-shift gearbox, a more modern and fuel-efficient variant (S1) which had a Nissan petrol engine and even a diesel variant (137D) whose engine was again from Nissan in an attempt to match the competition. None of these measures were successful and the car’s production finally ended in November 2000 FIAT AND TATA:
Under the agreement between the two companies, entered into in December 2006, joint venture Fiat India Automobiles was to handle sales and also make Fiat and Tata Motors cars at the Pune plant, earlier controlled only by Fiat. The ending of distribution tie-up was aimed at boosting the sagging sales of Fiat.
A necessary step to foster more auto alliances was carried out by Fiat at the beginning of 2011. Its industrial businesses were spun off from the holding company and two new companies, Fiat SpA and Fiat Industrial, began trading separately on the Milan stock exchange.
Fiat SpA includes Fiat Group Autos, Maserati, Ferrari, Magneti Marelli, Teksid, Comau, the portion of Fiat Powertrain Technologies that makes engines and transmissions for cars and the stakes in the Chrysler Group. The
split will allow Fiat SpA to focus on the growth of the automotive business and it is essential to the integration with Chrysler.
Fiat Industrial includes Iveco, the truck and engine maker; CNH Global, the agricultural and construction equipment manufacturer; and the industrial and marine part of Fiat Powertrain Technologies. The split will allow Fiat Industrial to avoid the evaluation of these activities using the lower multiples of the auto business. For years, financial markets have been asking Fiat to separate its auto business to avoid the conglomerate discount applied to a highly diversified industrial group.
It is evident that the Fiat breakup cannot be limited only to financial requirements but implies also industrial consequences in terms of alliances and joint-ventures.
Table 1 shows a list of the actions taken by main stakeholders and their equity stakes in New Chrysler. Table 1. Fiat-Chrysler alliance stakeholders’ actions and equity stake StakeholderActionEquity stakes
Fiat– Contribution in technology and intellectual property. – Offer access to global distribution network– 20% equity in New Chrysler It would receive 5% for meeting each of three performance goals: produce a vehicle at a Chrysler factory in the United States that performs at 40 mpg or better; provide Chrysler with a distribution network in numerous foreign jurisdictions; manufacture state-of-the-art, next generation engines at a US Chrysler facility. UAW (VEBA)– Make concessions on wages new workers ($ 14 an hour instead of US$ 28) with fewer benefits and partly shift of the retiree health care in equity11– 55% equity in New Chrysler, pro forma for Fiat additional equity United States
Treasury– Lend money for $5.9 billion plus waive repayment for $ 6.6 billion– 8% equity in New Chrysler, pro forma Canadian
Government– Lend money for $1.7 billion– 2% equity in New Chrysler, pro forma Secured lenders– Exchange $6.9 billion secured claim– Receive $2 billion cash Source: Adaptation from (SIGTARP, 2009)
The involvement of Fiat in the ownership structure has been a mixture of barter of technology and performance goals with equity stakes, along with onerous conditions to buy equities obtained from the other equity holders (US Treasury, Canadian Government and UAW).
So far, Fiat has fulfilled its end of the deal. As requested, the company has plans to fit Chrysler vehicles with fuel-efficient engines, expanded Chrysler sales overseas, and paid off loans from the US and Canadian governments. In return, Fiat has been allowed to raise its stake in Chrysler to a controlling 53.5 percent, up from 30 percent that came from its initial 20% plus meeting two performance goals). Fiat has the option to add another 5 percent of Chrysler when it produces a vehicle at a Chrysler factory in the United States that performs with at least at 40 mpg. This performance target is expected to be reached by the end of 2011.
The remaining 41.5 percent stake is still in the hands of the United Auto Workers (UAW).Fiat also holds an option to acquire 40 percent of the original stake held by the UAW’s retiree health-care trust. The option is exercisable from July 1, 2012, to Dec. 31, 2016, and in amounts of as much as 8 percent in any six-month period, according to the filing.
Making Fiat-Chrysler viable
There are three targets that all carmakers are reaching or are trying to reach right now. The first is to try to make vehicles as common as possible. The second target is to be present in growing markets. The third target is to get public aid and grants.
First target. Economies of scale by sharing more components across many models are possible. Indeed, the ideal would be to build a single model such as the famous Model T Ford in 1908, but unfortunately, this strategy does not work in terms of modern marketing. Customers have their own personality or, to put it as the experts, every brand and every single car has an emotional content that affects the sale.
If this is true, then, each model must be unique with a different exterior and the highest number of components (mechanical, electrical, or structural) absolutely identical or common. It is not a secret that a Fiat Panda and 500 are not as different as they appear. Or that all mid-sized cars of the Volkswagen group (Seat, Skoda and Audi even) are more or less successful clones of the Golf, the penultimate model.
The main area of savings regards the coordination of platforms and architectures between models of the company brands. In the case of Fiat-Chrysler, each automotive segment will be supplied with a dedicated platform following the specific national competences. The smaller vehicles will be developed by Fiat (mini, small and compact segments) and the other ones by Chrysler. Each platform should represent, on average, 1 million of vehicles, the same as Volkswagen, Ford, and Renault-Nissan, and ensure more bargaining power with suppliers. The drivetrain systems for the vehicles designed by Fiat or Chrysler will be preserved, but Italian capabilities with rear-wheel drive vehicles are minimal and Jeep is the recognised leader for four-wheel systems. The capabilities on automatic and dual-clutch transmission have been shared between the two companies.
Another strategy to save costs is the one promoted by Lancia-Chrysler, the identical model sold with different brands on the two continents, but the logic is the same because half of global sales take place in mature markets where competition is hard and margins and sales opportunities are limited.
At the moment, the integration between the brands Lancia and Chrysler is the more advanced feature in the rationalisation and realignment of product strategies of the two carmakers. In June 2011, about six hundred Lancia-Jeep dealerships, roughly two-thirds from Lancia’s existing network and a third from the previous Chrysler-Dodge-Jeep organization, opened for business in continental Europe, while 46 colleagues in the UK and Ireland remained under the old Chrysler-Jeep logos. These dealerships are getting a truly international portfolio.
The Lancia’s Delta compact hatchback comes from Italy, while the new Ypsilon subcompact is built in Poland and sold under the Chrysler brand in UK and the Lancia brand in the rest of Europe. Two models made in Canada, the Lancia Thema large sedan (a rebadged Chrysler 300) and the Grand Voyager minivan, will arrive at the end of 2011. In spring 2012, the market may get a US-built model, the Chrysler 200 cabriolet, rebadged as the Lancia Flavia.
Something similar is happening with the Fiat brand and the Freemont model, a rebadged Dodge Journey crossover built in Mexico. A Fiat-based subcompact car is on schedule to arrive in 2013 in the USA. The car could be a US version of the next-generation Fiat Punto. The car would give Dodge a subcompact to compete with such cars as the Ford Fiesta and Honda Fit. The same between Fiat professional and RAM that will begin selling a small panelled van built by a Fiat joint venture in Turkey in 2013
Costs can be cut through waste elimination. The implementation of the World–Class Manufacturing (WCM)operating system in all Fiat-Chrysler plants around the world is improving manufacturing operations, eliminating losses or waste as well as accidents or defects by copying where WCM succeeded.
Second target. The real bargains come mainly from emerging markets: Fiat results are supported by the Brazilian market, Volkswagen has three joint ventures in China, and General Motors’ revival is largely due to the flow of fresh money coming from sales in China. The future of automotive companies depends on emerging markets and those companies that are not in these countries have no future.
A South American presence is important, but it is especially important to be in China16, Russia and even Africa and the Far East. In these markets, demand drives supply. In addition, the lack of a car culture means the buyer does not pay particular attention to quality, finishing, and technological innovation. The cars are not, in most cases, those buyers are accustomed to in developed markets, while the prices are more or less the same, and thus the margins are higher.
One of the main challenges is making Fiat-Chrysler a global business. Although Chrysler repaid its loans to the US and Canada ahead of schedule, the automaker is still recovering in the US market. Overseas, Chrysler is virtually invisible. Brazilian operations keep Fiat alive, but the company continues to lose money in Europe17 and India. Fiat and Chrysler are not players in China, the world’s largest auto market, and their partners have little presence in Russia, Europe’s most promising market.
Third target. Mature markets need a real technological leap. The electric car is the most fashionable assumption and refined strategies are already in the field to show everyone that we are one step away from the target of a car that does not need to burn fossil fuels. Unfortunately that one technological step is a large one. The electric cars of today are only good if one drives for a few tens of kilometres per day. Mixed routes and highway driving does not allow for sufficient driving autonomy. Many governments provide financial R&D support for electric vehicle development as well as for plants related to the manufacture of these vehicles and their components.
But there is another way to get public funding, which nearly all countries are granting to the manufacturers, and that is to build plants in countries where you want to manufacture and/or sell your vehicles. Factories, among other investments, have been largely funded by public money or lured by countries with the promise of tax incentives for production. All the manufacturers of the world have chosen to locate a new plant or have decided to enlarge their production sites after having considered carefully the economic benefits offered by government. Some examples include Volkswagen in Russia, Renault-Nissan in South Africa, BMW in South Carolina, and Fiat in Serbia.
In this context the Fiat-Chrysler alliance will bring a big dose of Fiat’s fuel-saving technology to Chrysler’s gas-guzzling line-up. With help from Fiat, Chrysler is shifting from six- and eight-cylinder engines to more four-cylinder power plants. Chrysler’s strategy is to use a suite of systems to improve fuel economy and performance that includes:
eight-nine-speed automatic and a dual-clutch transmission; Fiat’s MultiAir engine, which varies valve timing for each cylinder independently and allows, with a very moderate cost, increased performance by about 20%, while also providing in all the features now considered distinctive of a product of excellence (torque and power for a sporty driving, low power consumption for a reduction of costs of use, and low emissions of harmful gases and greenhouse gases);
Fiat can also offer its long experience in diesel engines, but it depends on how much North America becomes more diesel-friendly. Flexible power systems of petrol-ethanol (developed for the Brazil market and called Flexfuel), of petrol-LPG and of petrol-CNG developed for the European market make the Italian carmaker the unopposed leader.
On the other side Chrysler can offer a new 3,000 cc petrol engine, called Pentastar with excellent performance, and more competences in electric vehicles and gasoline-electric hybrid vehicles which are receiving grants from US administrations, even if the best choice for Fiat rely is petrol-methane vehicles.
Nevertheless, at the moment Fiat-Chrysler on fuel saving technologies seems not to fit the new US government mandate. It’s also not clear how much Chrysler is getting from the government for electric and hybrid vehicle R&D. Chrysler has some but not much expertise in these areas, and they seem more focused on the Fiat engine integration that they will use to meet their government fleet fuel economy mandate for 2016, but this leaves them open to how to meet the more stringent mandate coming for 2017-2025.
DEVELOPMENTS AFTER MERGER:
Fiat and Chrysler’s loans are expected to be refinanced before the summer to take advantage of strong loan market conditions to cut borrowing costs and build in the flexibility to allow a potential acquisition to go ahead, the sources said. Fiat owns 58.5 percent of Chrysler and is trying to buy the remaining 41.5 percent that it does not already own and merge the two manufacturers into the world’s seventh-largest auto group by sales. The potential M&A financing is on a longer timeframe and is anticipated after the summer break, several bankers said. A 1.95 billion euro ($2.6 billion) refinancing for Fiat has been launched to nine relationship banks, which have been asked to commit by mid-June, a senior banker said. Fiat was not immediately available for comment.
Fiat is expected to be able to make a small reduction in pricing of 175 basis points (bps) over Libor on the original loan in October 2011, one banker said. Chrysler Group LLC is also talking to banks about refinancing a $3 billion, six-year syndicated term loan that it took out in May 2011, a U.S. banker said. The loan was part of a bigger deal that repaid $7.1 billion of loans from the U.S. government. The penalty that Chrysler has to pay to refinance its loan early falls to 1 percent in June and the company is expected to launch the refinancing shortly afterwards in mid to late June, two bankers said. “Barring a catastrophe in the market, I’m sure Chrysler will refinance,” said a loan investor. Chrysler’s improving fortunes mean that the company could cut its borrowing cost significantly to around 250 bps over Libor, bankers said. Chrysler is currently paying 475 bps with a 1.25 percent Libor floor.
“There is no reason that Chrysler should be paying 6 percent on a term loan with the pricing available in the market right now,” another U.S. banker said. Bankers said Fiat is focused on the two loan refinancings and is downplaying financing talks on a potential M&A deal. “The M&A situation will not materialize very soon; it is more likely after the two refinancings and after the summer,” a loan syndicate head said. Fiat has to resolve a price dispute with U.S. healthcare trust VEBA over 16.4 percent of VEBA’s 41.5 percent stake in Chrysler before proceeding with a potential bid. Fiat and Chrysler are getting closer to announcing a final deal to produce Jeep SUVs in China in a joint venture with Guangzhou Automobile Group, according to reports in the Chinese news media. Fiat and Chrysler said in January that they had reached a “framework agreement” with Guangzhou to build the SUVs in China. According to the Chinese Business News, the two parties will sign an agreement in the coming months.
A final agreement is crucial for Chrysler because the automaker wants to produce Jeeps in what has become the world’s largest automotive market. It would give Jeep its first overseas production as Fiat and Chrysler work to give the brand a larger global presence. The Chinese government must approve the deal before the partners can build a compact Jeep SUV by the end of 2014 and several more models in the next five to 10 years. Fiat and Chrysler both declined to comment on the reports.
The Italian automaker already produces the Fiat Viaggio compact sedan at Changsha, China, in a joint venture with Guangzhou Auto. Mike Manley, CEO of the Jeep brand.