FCA Proposes Merger With Renault
28 May 2019 - forbes
French automaker Renault is considering a merger proposed by FCA–the parent company of Fiat, Jeep, Chrysler–that would make the combined company the third largest automaker in the world.
Under Fiat's proposal, shareholders of both companies would receive 50 percent of the new company. The combination would have a total value on the stock market of $39 billion. Both companies were in talks for a strategic alliance over the weekend, but those talks evolved to a merger proposal.
FCA said in a statement that it was motivated by "the need to take bold decisions to capture at scale the opportunities created by the transformation of the auto industry in areas like connectivity, electrification and autonomous driving."
Renault said in a statement that its board will consider FCA's "friendly offer." Renault has an alliance with Nissan that is under severe strain at the moment. Renault owns 44% of Nissan and Nissan owns 15% of Renault. But the CEO who architected the alliance, Carlos Ghosn, is in a Japanese jail awaiting trial for alleged financial crimes, and Nissan is bristling under the terms of the alliance while Renault has been digging in on trying to preserve it and maintain control.
A merger of Renault and FCA with the many brands involved would make for the most complex alliance in the history of the auto industry, and will have analysts, experts and veterans of failed mergers chin wagging about whether it will work for months if not years.
There are plenty of reasons on paper to forge a merger. FCA needs a partner to share costs of electric vehicle and autonomous, or (self-driving) vehicles, and would realize huge efficiencies in the building of small cars in Europe and South America. FCA would give Renault a broader and friendlier merger partner than it has right now in Nissan.
Analysts will spend weeks weighing the relative benefits for each company. "Joining the Renault-Nissan-Mitsubishi in some way makes some sense for the Alliance, but it's not clear what Renault has that FCA wants other than scale," says Kristin Dziczek, Vice President of Industry, Labor & Economics at the Center for Automotive Research. Both FCA and Renault have a lot of redundancy in small cars in the European Union and South America with little strength in China, added Dziczek.
Rebecca Lindland of Rebeccadrives.com says FCA and Renault should find ways to achieve economies of scale in a hurry because of the similarities of their product lines in small sedans, hatchbacks, crossovers and small commercial vehicles. "The brands and markets are diverse, many of the customer mindsets are similar: a desire for reliable, durable, value- oriented transportation," says Lindland. "Working towards a common customer can create economies of scale faster, especially on behind the scene parts like wire harnesses, mechanicals, seat frames, etc. - parts the buyer won't see or can be cosmetically customized...there's a lot of potential upside should this deal materialize."
The timing of the talks and likely deal coincide with talks Renault is engaged in with Nissan to redefine the terms of the two-decade old alliance between those companies in the wake of the arrest and pending criminal charges against the Alliance CEO Carlos Ghosn.
Ghosn is under arrest in Japan, and faces multiple counts of criminal financial crimes in a forthcoming trial. Ghosn was the architect of the Renault-Nissan alliance deal that began in 1999. And while many point to that alliance as a model, it has been fraught with cultural clashes and enormous difficulty in getting the two companies to agree on platform sharing, which in turns creates enormous savings on R&D and purchasing.
Small cars are not terribly profitable, but necessary in the EU, Latin America and Asia, so FCA and Renault could, in addition to forging a common future around electrification, consolidate expenses and investment in that area. Such efficiencies will result in job losses, but also make the allied companies more competitive with Volkswagen and Japanese and Korean automakers in those markets. Nissan and Mitsubishi have pioneered EV tech with Renault that should be available to FCA under preferred license agreements, and that is worth a great deal because FCA has not been aggressive in developing its own.
How Renault's existing alliance with Nissan would be impacted is not yet clear. Since Ghosn was arrested and subsequently dismissed by both companies, the companies have been negotiating for a new deal that rebalances the influence in Nissan's favor. By striking a deal with FCA, Renault will have more leverage in those talks. Nissan probably doesn't want to be without a global alliance partner. On the other hand, if an FCA merger deal causes Renault and Nissan to divorce, then Nissan could seek a new alliance partner. General Motors perhaps?
FCA and Renault purport to save in excess of $3 billion a year in savings. Their target is to hit $10 billion a year in the next decade. FCA's statement says the proposed merger would eventually save $5.6 billion per year, Fiat said. At the same time, Fiat said, the deal would not result in any plant closings. The merger "would create new opportunities for employees of both companies and for other key stakeholders," Fiat said.
The French government holds a stake in Renault, but thus far favors the deal.
"We must of course see in what conditions it will happen," French government spokeswoman Sibeth Ndiaye said Monday. "They must be favorable to the economic and industrial development of Renault and its employees," she added. "A merger would also create a needed European giant at a time of fierce competition in the global auto industry," she said. "Giants have been built outside Europe. We need giants in Europe."
In the absence of a powerful force of personality like Ghosn, the other X-factor in making this alliance of these companies deliver gains and efficiencies is who will be the tie breaker to settle differences between companies trying to collaborate on vehicles and technology when the teams disagree. Renault and Nissan ran into this problem on several vehicle sharing programs.
For the part of FCA that is the old Chrysler Corp., this deal is yet another chapter of mergers. Jeep, the most valuable brand in the FCA portfolio, was at one time part of American Motors Corp. Back in the 1970s, AMC had a tie-up with Renault that resulted in AMC dealers selling Renault branded vehicles in the U.S. Chrysler then acquired AMC. In the 1990s, Chrysler was acquired by German automaker Daimler Benz, but that merger was unsuccessful, fraught with cultural differences and the inability of Daimler's luxury-focused management to manage Chrysler's mass-market portfolio. Fiat acquired the Chrysler Corp business from venture capitalist Cerberus in 2009 amidst the global financial crisis with help from the U.S. government and United Auto Workers Union.
Automotive mergers and acquisitions have a terrible history of infighting, unrealized dreams, culture clashes and broken careers.
Under Fiat's proposal, shareholders of Fiat Chrysler would share a dividend of 2.5 billion euros, or $2.8 billion, that reflects the company's higher value on the stock market. FCA shares are down 25% since February as the company has seen sales in the U.S. drop, and Wall Street has been bearish on the company's outlook in Europe and in the developing EV space.
It is a national holiday in the U.S. U.S., and markets are closed. But Renault shares soared almost 14 percent in Paris trading while Fiat Chrysler shares rose more than 10 percent in Milan.
This story was updated since its initial posting