Howes: Marchionne’s merger mania lives, despite GM ‘no’

Sergio Marchionne’s hunt for a partner is far from over.

Directors of Fiat Chrysler Automobiles NV, set to meet in London on Thursday, are expected to review a more detailed analysis of potential tie-ups with several automakers, according to two sources close to the situation. The companies include General Motors Co., Volkswagen AG and Renault-Nissan.

Marchionne, the FCA CEO, makes no secret that he covets GM most. Still, CEO Mary Barra and GM’s directors, in a March 12 letter, rejected a proposed merger that envisioned absorbing FCA into GM, calling the new entity General Motors and headquartering it in Detroit.

No deal. But the global auto industry’s shrewdest dealmaker isn’t quitting — even if it means trying to mount a hostile takeover of the nation’s No. 1 automaker to realize his vision for driving consolidation to achieve greater economies of scale and fatter shareholder returns.

He’s retained consultants to test his team’s assumptions of a tie-up with GM and others. He’s also telegraphing who he sees as a potential partner: United Auto Workers President Dennis Williams and the union’s retiree health care trust, whose 8.7-percent stake in GM makes it the company’s largest shareholder.

“Whatever happens in terms of consolidation, it would never be done without the consent and support of the UAW,” Marchionne said earlier this month at the opening of FCA-UAW national contract talks. “It’s that simple.”

Not exactly.

Should Marchionne assemble a stable of like-minded shareholders who embrace his industrial logic and move to acquire GM shares, a tie-up with GM — more than deals with VW or Renault-Nissan — likely would face resistance on multiple fronts.

An FCA-GM merger would give the new company 50 percent of the North American pickup and SUV market, according to an analysis by Sanford C. Bernstein & Co. LLC, highlighting one of many potential anti-trust problems the deal likely would encounter from regulators in the United States and overseas.

“We would assume that FCA-GM would run into all sorts of anti-trust issues,” Bernstein wrote in a report last month. “But Marchionne has already said in public (back in 2014) that he believes regulators could be persuaded to allow a deal if it permitted the industry to hit future fuel economy targets.”

The Obama administration, politicians on both sides of the aisle and some segments of the general public may disagree. Six years after American taxpayers rescued GM and Chrysler Group LLC from automotive oblivion, the prospect of an FCA-GM merger likely would raise fears of lost jobs, plant consolidation and disruptive restructuring.

In his public musings, Marchionne explicitly says he would not engineer a deal that endangers “the blue collars,” as he said two weeks ago. He’s less categorical about salaried employees, or details of how a merger would affect brands and sales networks, among other things.

Additional complications likely would come from the UAW, too. Marchionne considers union support critical to whether and how he could craft any transaction with GM or others. He and Williams have known one another for nearly a decade, when Marchionne was named chairman of Fiat SpA’s CNH agricultural equipment unit.

The relationship may prove beneficial during labor talks, but it’s less clear it would assure anything approaching UAW support for what would be an industry mega-merger. More than his predecessor, Bob King, Williams favors a business-like approach to bargaining and expresses caution about prospective deals that could affect adversely his members.

More importantly, the UAW Retiree Medical Benefits Trust’s stake in GM isn’t without significant strings. Under a 2009 agreement between post-bankruptcy GM and the U.S. Treasury Department, the union’s shares must be voted proportionately with the remaining shareholders — effectively making it difficult, if not impossible, for the union to become a party to anything like a hostile takeover.

The arrangement means the union, through the health care trust, does not wield outsized influence as a major shareholder in GM, according to several sources familiar with the details. But the union arguably does have greater sway inside GM than it did before its epic collapse into Chapter 11 bankruptcy.

The UAW also has a representative, retired UAW Vice President Joe Ashton, on GM’s board of directors. As a practical matter, that seat and the health trust’s stake gives the union access to GM’s strategic thinking, including its internal assessments of such prospective transactions as the one proposed by Marchionne.

Barra’s letter to Marchionne rejecting his proposal offered no rationale for GM’s decision. But an extensive review conducted in 2012 by then-CEO Dan Akerson, Vice Chairman Steve Girsky and GM President Dan Ammann — each veteran dealmakers — evaluated multiple combinations. They ranged from powertrain joint ventures and specific brand acquisitions to a complete merger, according to a ranking source familiar with the process.

Impediments to a potential deal included anti-trust concerns; the likelihood of political backlash; the probable need to build more corporate infrastructure; and the likelihood that it would be far easier to identify the upfront expenses associated with the transaction than the follow-on “synergies” so often touted by investment bankers but rarely realized.

Marchionne is privately dismissive of such concerns, focusing instead on the valuable amalgamation of brands, engineering know-how and global reach that could be achieved with GM. A chart he uses to bolster his point shows an FCA-GM tie-up would deliver more to markets and shareholders than mergers with either VW or Renault-Nissan.

Italian by birth but reared and educated in Canada, he believes an FCA-GM combination would build an American automotive juggernaut to rival the brand portfolio of VW and the scale of Toyota Motor Corp. The extended Agnelli family, whose holding company owns 30 percent of FCA, would diversify its extensive holdings by owning a smaller piece of a more valuable GM.

The trick is making the sale from what is perceived by analysts and rival automakers to be a position of weakness. FCA is smaller, has more debt and less cash than GM. Its leadership looks both opportunistic and a little desperate. The lack of major GM shareholders with whom to partner, for now, makes a run at GM all the more complicated.

And FCA’s deepening tangles with federal regulators arguably make it a less attractive partner — at least for the time being. Vehicle buybacks and fines are likely to cost the automaker heavily, even as they sully the brand cred of heavyweights like Jeep and Ram.

That’s not helpful, but it’s not permanent. The changing global automotive landscape is most challenging to those who lack the cash and scale to compete and profit — a fact Marchionne knows, and he’s trying to do something about it.

Daniel.Howes@detroitnews.com

(313) 222-2106

Daniel Howes’ column runs Tuesdays, Thursdays and Fridays and can be found at http://detroitnews.com/staff/27151.