PSA + FCA: A marriage made in heaven?

Earlier this week Fiat Chrysler Automobiles (#FCA) and #PSA Group announced the intended all-share #merger between the two automakers to better cope with slowing demand, rising costs of production, and pressures to comply with environmental regulation.

The new company is set to become the 4th biggest automaker in the world with combined annual sales of around 8.7m vehicles, revenue of $189bn, operating profit of $12bn and a combined market cap of $48bn.

The two companies currently operate 14 brands globally (see image above): FCA contains Fiat, Jeep, Dodge, Ram and Maserati, while PSA includes brands such as Peugeot, Opel and DS. This leaves scope for consolidation and efficiencies to be unlocked.

“[We are] lagging far behind the #competition in terms of #technology and #product range,” the companies stated in a release. To address such issues will require significant #investment. Yet, I suspect the company will focus instead on cost cutting over the coming few years. For example, post-merger there will be a combined excess production capacity of 5 million units. Closing plants would make financial sense, but unions and regulators may not appreciate this. So, the new board may have some tough decisions to make in terms of keeping #regulators happy and managing a massive product / brand portfolio, as well as cutting costs without closing factories.

The company is expecting annual #synergies of $4bn, with about 80% realised by the fourth year. These are expected to come from product expenses (40%), purchasing (40%) and other areas such as marketing, IT, etc. (20%).

Ironically, this represents the biggest auto-merger since the ill-fated acquisition by Daimler-Benz of Chrysler in 1998. I often use this case in my International Business Strategy elective as it clearly illustrates the challenges posed with acquisitions no matter how ‘perfect’ it appears on paper. I attach my slide deck below.

Research shows that the biggest cause of failure with acquisitions relates to #culture issues. This is a problem that may also derail the latest action. The new company is a ‘merger of equals’, yet the Peugeot family will gain only a 6% stake in the new company, while the Agnelli family (currently 29.2% owners of FCA through Exos) will become the single biggest investor. John Elkann, an heir to the Agnelli interests, will chair the new board and retain his position as CEO of FCA.

The new board will consist of 11 individuals, five nominated by PSA and five nominated by FCA, while current FCA chair Carlos Tavares will be the 11th member.

Tavares will hold this position for five years and it remains unclear what will happen beyond this point. However, Reuters has reported that PSA seeks a numerical advantage after Tavares steps down.

I feel that the success of this merger does not lie with the capability of the companies to avoid anti-trust issues, reduce costs or develop products, but rather in the ability to solve a potential #leadership struggle.