A new start for the new year – The Economist (blog)
In an unexpected deal on New Year’s Day, Italy’s Fiat and America’s United Auto Workers union (UAW) announced an agreement that will give the Italian carmaker complete control of its American ally, Chrysler.
The settlement is a personal victory for Sergio Marchionne, the chief executive of both Fiat and Chrysler, who had hoped to complete the merger of the two companies that was set in motion when Fiat helped pull Chrysler out of bankruptcy in 2009. In recent months there had been concerns that the transatlantic alliance might come apart if Mr Marchionne could not reach a deal with Chrysler’s minority stakeholder, the UAW’s retiree health-care fund, commonly known as VEBA.
It had seemed increasingly likely that a sharp disagreement over the price of the union’s 41.5% stake would force a Chrysler IPO, something that Mr Marchionne warned would make it difficult for the two companies to work as an integrated whole.
Fiat initially acquired a 20% stake in Chrysler in 2009. It increased its stake in the following years by meeting government-set hurdles and then by paying off Chrysler’s remaining bail-out loans. Under the terms of yesterday’s agreement, Fiat will pay the UAW retiree fund $1.75 billion from its own bank account, and Chrysler will chip in another $1.9 billion. Chrysler also agreed to pay the VEBA an additional $700m in four $175m annual installments after the merger is completed.
The settlement is larger than Fiat had originally hoped but the union was originally demanding more than $5 billion for its Chrysler holding. Sources say the UAW may have decided to lower its price after sensing little support from financial markets for the proposed IPO, which it was forcing on Mr Marchionne. Expressing strong “emotion” with the prospect of a full merger within reach, Mr Marchionne and Fiat’s chairman John Elkann (who sits on the board of The Economist‘s parent company), e-mailed employees of the two companies asking them to “remain united” to make Fiat-Chrysler “a model of speed and efficiency.”
Analysts suggest that the deal will prove critical to transforming both Chrysler, the smallest of Detroit’s Big Three carmakers, and Fiat, a struggling European company, into a true global powerhouse. But its success is far from certain, cautions Stephanie Brinley, of IHS Automotive. “That’s the next issue,” she says, “how do you take two weak players and create one strong player?” Fiat’s sales in Europe are the lowest in a generation and it is struggling in its vital Latin American market. In October it slashed its profit forecast for 2013. The cash churned out by a profitable Chrysler will help to keep it going, but over the longer term Fiat-Chrysler must increase production to around 6m vehicles a year and produce more premium cars if it wants to be in the same league as General Motors, Toyota and Volkswagen.
As Mr Marchionne and Mr Elkann noted in their employee e-mail, the two carmakers have already merged important operations such as product development. Rebadged Chrysler products have fleshed out the European Lancia line, for example, and platforms based on Fiat products are allowing Chrysler to expand its offerings. One of those, the new Jeep Cherokee sport-utility vehicle, is a finalist for North American Truck of the Year, a victory that could lend credibility to Mr Marchionne’s grand vision.