Fiat-Chrysler and PSA Merger: A tie-up (in times) of uncertainty
4 November 2019
Two of the largest automobile manufacturers have tentatively agreed to combine their forces in a ‘merger of equals’. Fiat Chrysler (FCA), the Italian-US business behind Jeep, Alfa Romeo, and Maserati, is set to merge with France’s PSA, which owns Peugeot, Citroen and Vauxhall, in the hope of tackling issues with environmental regulation (FCA’s CO emissions), strong competition in new technologies (electric cars) and contemporary aspirations (self-driven vehicles). The new company will be able to boast revenues of €170bn, after PSA divests part of its assets in order to make this merger as ‘equal’ as possible. The question investors must be asking is whether the new automobile giant, the fourth largest by market value (circa €43bn), will be able to emerge larger than its parts or shrink in the process.
The executive team believes the deal will benefit the owners of FCA-PSA, with estimated synergies of €3.7bn, which are expected to be delivered within the next few years. However, the estimated cost of achieving the synergies will be €2.8bn. These figures may be asymmetric in their derivation: the cost of synergies must include labour adjustments, legal and listing issues, as well as the integration of software and management systems. Synergy figures are based on the premise that cost synergies will materialise smoothly and revenue synergies, if any, will uphold against a potential downturn in the global economy.
Even if synergies are reflected fairly on share prices, it seems that investors may ignore the deep corporate governance issues arising with this merger. Following the deal, the combined company will have listings and head office locations in France, Italy, and the US, while the group will be based in the Netherlands. The diverse geographical mix may enable agile responses to local challenges, but the compounding of governance complexity seems currently inevitable.
Investors may also need to review what ‘merger of equals’ means in reality. Jefferies, a financial services company, has estimated that the configuration of the deal suggests that PSA has ‘paid’ a premium of 32% in order to join FCA on an equal footing. Thus, FCA shareholders will benefit at the day of deal signing, which will take a couple of months at best, while PSA shareholders should wait for incremental benefits to materialise. This may not sound ‘equal’ to bystander financiers. This ‘inequality’ may be amplified by the type of owners in the structure of each firm; the French and Chinese governments have material stakes in PSA, therefore political issues could further impede governance.
Finally, investors and automobile specialists may be discounting the compulsion of ambitious people to attain more power. The division of top roles seems fairly equal at the moment, but we have seen rather dramatic internal strife for corporate control over the years. In addition, the recent attempt by FCA to merge with Renault may suggest that the current deal is an act of desperate need for growth instead of a well-thought out investment.
This deal may bear an institution resilient enough to withstand the tide threatening to reshape the automotive industry. At the moment, investors should manage their expectations.