Not one to give up on corporate marriage, FCA CEO Sergio Marchionne posted a merger thesis on his company’s website prior to FCA’s Q1 2015 earnings call.
The 25-page PowerPoint presentation – titled “Confessions of a capital junkie” – makes the case for consolidation by outlining several key issues all automakers are facing, and the savings that could be garnered only through consolidation, Detroit Free Press reports.
Despite being blown off by General Motors, Ford, Peugeot and a handful of others over the past few weeks, Marchionne states the presentation doesn’t let his company off the hook as far as its current position “in the automotive food chain” goes, nor is it an attempt to sell FCA, a revision of his five-year plan, or his “final big deal.” Instead, he goes into the need to consolidate companies to better handle increasing capital investment costs as far as rapid technological development, climbing regulatory costs, and tightening emissions standards go.
According to Marchionne, consolidation would not only reduce the aforementioned costs, but better optimization of industrial allocations and “an exceptional value creation opportunity for shareholders” while leaving jobs, distribution and brands untouched.
[Photo credit: Italian Embassy/Flickr/CC BY-ND 2.0]
IMO the only thing that is concerned about is being the smartest guy in the room and his legacy.
These are standard arguments for M&A. Regardless of the industry, the line of reasoning is similar.
Yet about half of M&A deals destroy value instead of create them. As it turns out, it can be expensive and inefficient to combine enterprises together. Diseconomies of scale and culture clashes aren’t unusual.
You nailed it! I’ve lived through too many.
Yes: fifty fifty are/is poor odds. Look at what happens to brand identity for a start. Peugeot destroyed Citroen; Fiat ruined Lancia and Alfa Romeo; GM destroyed Pontiac and Olds and could not support Saturn; Ford could not digest tiny Jaguar and killed Mercury: BMC killed everything it touched except Jaguar. Renault has been lucky with Nissan and FCA’s case is still open.
Who said anything about fifty-fifty? That’s not how Sergio operates. In a true merger, he’s still in charge, or he’s angling for another deal like he had with GM, getting paid $billions to allow his “partner” to back out of a bad deal.
The idea that cars will be limited to global conglomerates with a minimum of 7 million cars sold is just his vision. If he knew how to run a car company, he’d have bailed out of Europe and concentrated on North and South America. He just doesn’t know how to run a car company, and his Italian engineers can’t put out variations of a platform the way Iacocca did with the K car and build volume with inexpensive “new” product.
You missed the point. About half of M&A deals fail. 50-50, as in 50% of the deals.
spreading out r & d costs is fine, but isn’t the big costs in labor and materials?
Merging companies won’t do much if anything to reduce the cost of steel and plastic.
It should theoretically reduce overhead costs. R&D is one of those, and it is significant in automaking.
Merrill Lynch estimates that parts and labour are less than $15,000 per vehicle, while the average vehicle in North America sells for over $30,000. Overhead and R&D costs are huge.
There are not many industries that have more large firms than the auto sector, and it will stay that way until countries let a few of their major firms disappear.
Auto firms have outsourced almost all the parts to the car, with the exception of the powertrain and the body. At some point gas and diesel engines will become a commodity as well – most consumers don’t give a damn about who makes the engine. Transmissions are already becoming something supplied by the parts manufacturers.
The top 10 manufacturers control about 75% of the world market. Further consolidation seems likely.
I believe the economies of scale are in marketing and advertising. R&D is small (most now done by suppliers). Manufacturing cost don’t really scale much, once your FCA’s size. But the ability (cost) to get your car in front of eye balls and on the mind of buyers in-print and on the web definitely decreases (per unit) as you scale up in size.
R&D is typically about 4-5% of a major automaker’s budget.
The issue is one of marginal costs, i.e. the ability to reduce expenses through improved efficiency. Developing a platform can cost several hundred million to a billion dollars. If those costs can be spread out across more units or shared with another company, then all of those savings go straight to the bottom line.
Chrysler death watch Pt. III ?
Just skimmed a bit the report.
“A matter of life and death for FCA?” – time for a death watch?
“Auto industry’s capex and R&D requirements have grown significantly over the past years …” – no kidding? Is he stating facts as just found out?
Mr. Marchionne is anything but dispassionate. I would let him go back and look at reliability reports and improve on those. Then he should come back and start looking for another groom. If anything, former Chrysler / Dodge / Jeep raised the average quality for all cars coming from FCA.
You need to read it more carefully. It says “What this is not about…A matter of life or death for FCA.” The word “not” is underlined and in bold.
Sooooo, Marchionne wants us to drive “spec-cars” like in Indycar or NASCAR?
“speck” cars (see the FIAT 500 for example) :)
Sergio: “Eh America, whatsamatterforyou you no like-a dees little Fiats??!?!?!”
‘murican: “No way Serge! Because if I drive that I’ll wind up a “speck” on the front grille of some mindless, inconsiderate, make-up applying, texting while driving Cadillac Escalade driver.”
Executive who stands to profit handsomely from merger wants merger. Film at 11.
A very large chunk of M&A activity has nothing to do with the best interests of the company and everything to do with ways to personally enrich the executives and bankers involved.
In this case, I get the sense that Marchionne is genuinely afraid that VAG is taking over Europe at FCA’s expense, and he sees market share and scale as the only way to stop it. (He will not admit this, of course.)
This.
It’s worth mentioning that DeLorenzo at Autoextremist has been pumping rounds into Marchionne for years. I don’t know squat about the latter, but DeLorenzo seems like the kind of guy who loves this kind of inside baseball, so I tend to take his word for it (his own loyalty to Detroit lifers and tendency to be strident notwithstanding).
Marchionne is a finance guy, and DeLorenzo loathes him for it. Which is to say that DeLorenzo is a crank.
I don’t think you understand how close to your “work space” that I am.
3 point plan:
1) Merge/acquire (usually through sale of covenant light bond issuances {and indentures} yielding unnaturally low – thanks, central banks! – yield).
2) Acquire target/merge and lever up debt levels even more via more debt issuance (sales) and share issuance (dilution).
3) Profit.
Is there anything in the Powerpoint about how Alfa is going to sell 300K units in the US by 2017?
Slide 23, trust me, look what I did with Lancia!
I love Alfa’s vapourware.
Sergio also said he’d consider merging with Apple or another technology company. How embarrassing for him
A deal with Apple would be great for FCA. However, the benefit would not be mutual.
FCA really wants to get married, but no one has much reason to take her to the dance. It would be interesting if Marchionne could force some sort of hostile takeover of a firm such as PSA, but I doubt that he has access to enough resources to make that happen.
Firstly, there is no such thing as a “merger”. There are only acquisitions. When a deal is called a merger (and especially if it’s called a “merger of equals”), it signals failure.
Acquisitions succeed when there is a clear sense of who is taking over whom, and the culture of the acquiror prevails from the outset. It’s easier to do this when then acquiror is substantially larger than then target, and has a dynamic leader and management team.
And that management needs to have a clear sense of what it wants from a deal. Mass for it’s own sake doesn’t work. Cisco and NCNB (now Bank of America) are classic examples of companies that knew what they wanted an acquisition program to achieve, and how they would realize value from a deal.
Too many CEOs turn into deal junkies, looking for growth for its own sake – perhaps because it justifies higher compensation packages for themselves?
Applying this to the auto sector, if FCA wants to be a buyer rather than a seller, there’s not much to pick from – maybe Suzuki (if Suzuki can remove VW from the picture), maybe Mazda, not much else.
Sergio’s quest doesn’t look to me as likely to bear fruit.
Sergio Marchionne seem to be selling the idea that big corporate monopolies are good for the economy. And he is right, they are good, very good in fact, for the economy of the one percenters.
The Bilderberg group has been working on achieving this same very goal for the last 60 years or so.
It will come as no surprises to learn that Mr. Marchionne himself has for a very long time been a regular attendee to this infamous Bilderberg group.
But I’m sure is just a coincidence…
Sergio needs to look at someone in the EU to take control of. Or at a minimum buy into to give him some leverage at the table. He also needs someone to finance his goals.
Sergio missed a great chance the French government grabbed in buying into Renault from under Ghosn’s nose and Ghosn’s pi$$ed at that, by the way.
Fiat is faltering in the EU, which is a pity.
Fiat needs to find a middle size manufacturer that’s progressive to side with. Mazda would be ideal.