Earlier this month, General Motors (NYSE: GM) rejected a merger approach from its rival Fiat Chrysler Automobiles (NYSE: FCAU).
General Motors CEO Mary Barra basically said that GM has no need for a merger and that it has already improved operations markedly. The company is on track to sell the most vehicles in its history this year.
This “improvement” apparently has been missed by investors. GM’s stock has barely budged since it emerged from bankruptcy and went public again in November 2010.
Perhaps that is why Fiat Chrysler CEO Sergio Marchionne chose this moment to strike, hoping to gain the support of disgruntled shareholders.
Marchionne Says Industry Needs to Consolidate
Marchionne is, of course, the deal maker that brought off the Fiat-Chrysler merger. In April, he gave an impassioned presentation on automotive mergers. In it, he called for consolidation in the industry.
Marchionne said that automakers need to join forces to fund the large expenditures required to bankroll the development costs of greener vehicles and smarter, self-driving cars.
“The amount of capital waste that’s going on in this industry is something that is not to be countenanced,” Marchionne said. “And the remedy in our view is consolidation.”
He has a point.
In the past five years, the big three global automakers – Toyota Motor Corp. (NYSE: TM), Volkswagen AG (OTC: VLKAY) and GM – have spent a ton of money. The total for research and development and capital expenditures is a whopping $315 billion.
Marchionne pointed out that the industry does not cover the cost of capital. In other words, the returns do not justify the massive investment.
Source: Financial Times
So the logic behind industry consolidation is there. But will it happen and will Fiat Chrysler be in the middle of it?
Fiat Chrysler Looking for a Dance Partner
Marchionne certainly would like to be in the center of the action. His company suffered greatly when European vehicle sales tanked after the financial crisis. And in Brazil, where Fiat is the market leader, sales are plummeting because of the poor economy.
Net debt of 8.6 billion euros as of March 31 is also an obstacle. The company paid nearly $2.2 billion in interest and other financial expenses last year.
That’s not a good thing when big investment plans loom on the horizon. Some of these plans involve building Jeeps for the Chinese market and the revival of the classic Alfa Romeo brand. Fundraising by the company via an initial public offering of 10% of another iconic brand, Ferrari, has been delayed to the fourth quarter of 2015.
Fiat Chrysler also has lower profit margins than its rivals. In North America, its margin is 3.7% – half that of GM. Both Toyota and Volkswagen enjoyed net profits 30 times higher than Fiat’s in the latest reporting period.
Marchionne has gone as far as reaching out to activist shareholders and hedge funds in his quest to pursue a merger with General Motors – but with no success. This follows reports that both Ford (NYSE: F) and Toyota rebuffed merger overtures from Marchionne. The bottom line here is that Fiat Chrysler seems to be looking for a partner with a bit too much desperation.
But that’s not to say that some merger and acquisition activity won’t happen in the auto sector.
The company most vulnerable is General Motors, due to the fact that it does not have any large family backer or state stockholder. Other companies including Ford, Volkswagen and BMW (OTC: BAMXY) have families in charge with large, controlling stakes.
But as long as sales stay strong, there is little incentive for GM to listen to any deal proposals. If consolidation and change come to the auto industry, it may be from a surprising direction.
Smart Cars Are the Future
In May, Marchionne spent time with fellow chief executives Tim Cook of Apple (NASDAQ: AAPL) and Elon Musk of Tesla Motors (NASDAQ: TSLA). He also went along for a ride in one of Google’s (NASDAQ: GOOGL) self-driving cars.
Interestingly, Marchionne said these groups should be part of the dialogue in industry consolidation. And it has long been speculated that Apple is interested in electric vehicles through a secretive program dubbed “Project Titan.”
Technology is surely the future of the auto industry. As this report from Wyatt Research growth stock specialist Tyler Laundon shows, the smart car market is ready to expand exponentially, and could be an untapped source of high-speed profits.
Perhaps Marchionne finds his company’s salvation from some sort of collaboration with one of these tech giants. Do not be surprised if this ultimate deal maker pulls a rabbit out of the hat. It makes Fiat Chrysler an interesting speculative play, and certainly a company to watch moving forward.
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