Fiat CEO’s merger confession called ‘spot on’

Tommaso Ebhardt
Bloomberg News
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After failing to win over fellow auto executives with his call for mergers, Fiat Chrysler Automobiles NV Chief Executive Officer Sergio Marchionne is at least getting his point across with some of those companies’ owners.

Months of fruitless appeals and subsequent rejections from General Motors Co. and others prompted Marchionne to expound on the benefits of consolidation in a 26-page presentation, called “Confessions of a Capital Junkie.” The April 29 appeal was a direct call for investors to agitate for a deal. At least on the surface, some support his one-man campaign.

“Marchionne is spot on,” said David Herro, manager of the $31.4 billion Oakmark International Fund, which owns stock in carmakers as well as Fiat’s controlling shareholder Exor SpA. “The entire industry needs transformative M&A. We would be strongly supportive of industry consolidation.”

Marchionne’s challenge will be to turn supportive rhetoric into action. Quoting Lewis Carroll’s “Through the Looking Glass,” Marchionne’s warns that the auto industry is “a slow sort of country,” with a dim future because companies need to run very fast just to stay in place. That’s because multiple manufacturers develop the same technology, only to reap margins that are too thin to recoup their investment.

“Marchionne is right,” said Emanuele Vizzini, chief investment officer at Investitori Sgr in Milan, who manages $3.8 billion including shares in Fiat, GM and Ford. “While margins in North America are now high and close to a peak for GM and Ford, the structural problems of the auto industry are still there.”

Better alone

Still, the Fiat CEO’s call might not help much. Even if a smattering of investors like the idea, actively pushing for a deal is a stretch because of management resistance. And even if they would seek an auto merger, they might not decide that the Italian-American automaker, which lacks a big presence in China and has thinner margins in the U.S. than GM and Ford, is the right partner.

While Marchionne has said a combination with GM or Ford Motor Co. would be “technically feasible,” the U.S. automakers have dismissed the idea. GM CEO Mary Barra said earlier this month the carmaker can earn better returns on its own. Barra in March rejected an invitation from Marchionne to discuss a merger, the New York Times reported on May 23.

“I’ve been listening to some of the comments that have been made,” Marchionne, the architect of the merger that created the world’s seventh biggest carmaker, said this month. “There’s not a single guy that has taken issue” with the analysis of the industry, “but everybody is bent on saying, I can fix it by myself’.”

Consolidation needed

After being rebuffed by auto executives, Marchionne has turned to sending his message to shareholders with an “activist bent,” Morgan Stanley analyst Adam Jonas said in a report. Unlike Ford, GM “has no blocking-minority investor to thwart any potential investor-led appeal.”

“Consolidation is definitely needed,” so “perhaps FCA and GM could work,” said Herro, whose fund owns about $290 million in Exor shares as well as $3.8 billion in Toyota, Honda, BMW and Daimler stock. Harris Associates LP, his fund’s parent company, is GM’s second biggest shareholder, according to data compiled by Bloomberg. Harris declined to comment.

While Marchionne has said there’s no pressure to do a deal, his options could be reduced once the plan to spin off Ferrari is carried out. Filings for an initial public offering of the profitable supercar maker, which were originally slated for the first quarter, have yet to be made. Fiat plans to complete the spinoff the first working day of 2016.

‘Lone voice’

The lack of willing partners for Fiat is partly due to the fact that automotive deals have often failed as carmakers discover their operations aren’t as compatible in reality as they look on paper. In recent examples, BMW AG unwound its 1994 acquisition of Rover, and Daimler failed to make its merger with Chrysler work.

“Marchionne is going to remain a lone voice on this subject as no other carmaker wants a merger and the capital markets can’t force one,” Max Warburton, an analyst with Sanford C. Bernstein, said in a report questioning the CEO’s efforts. “So Fiat Chrysler is going to need to plough on alone.”

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