Fiat Group Announces Acquisition Of Remaining 41% Of Chrysler Group For $4.3 Billion

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 John Elkann /Getty

The global automobile industry is so tough that there is rarely a happy ending once one of its major players gets into big trouble. It is even more rare when this happens twice.

Yet that is what indeed has just happened to the Chrysler group. The future for the company looks very bright now that the European automobile group Fiat, which already owns 59% of the company, and the United Autoworkers Trust ( UAW) which owns the rest, have agreed terms for a purchase of the UAW’s remaining shares that will permit a full integration of the two car companies.

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The deal

With a new year comes potential for new beginnings. On Wednesday, Fiat announced that it had reached an agreement to buy the rest of Chrysler, the 41% it did not already own, for US$4.35 billion from a trust that holds the shares on behalf of the United Automobile Workers retiree health care fund.

The deal will be funded initially by a cash payment by Fiat of US$1.75 billion and a cash payment by Chrysler of US$1.9 billion. Chrysler has also agreed to pay the trust a total of a further US$700 million, in four future annual installments, as well.

John Elkann, Chairman of Fiat and Chairman and Chief Executive Officer of Exor the family holding company said, “I have been looking forward to this day from the very moment that we were chosen to assist in the rebuilding of a vibrant Chrysler back in 2009.”

For Elkann this is certainly a key transaction, cementing as it does one of the key pillars of the family’s investment structure, and not at all incidentally vindicating his own succession as head of the family’s business interests after the death of his grandfather Gianni Agnelli in 2003.

Fiat and the UAW trust have co-owned Chrysler since it emerged from bankruptcy in 2009. Holding 100% of the company will now make the combined Fiat-Chrysler the seventh-largest automaker in the world. The deal is expected to close on January 20th, 2013 – a mere blink of an eye-lid in the normally relatively sedate pace at which large M&A deals tend to close.

Such speed in itself reflects the likelihood that both sides must have been working to bring this to a head for quite some time, on a cooperative basis. A few weeks ago in fact Chrysler cancelled an impending possible alternate course of action, the issuance of an IPO to satisfy the needs of the UAW trust. That is when the hard work probably began in earnest therefore leading to today’s announcement.
This is really smart for both sides as there is no time to be lost in quickly beginning the process of integrating the operations of the company to ensure its success where it counts – out in the market place.

At the end of the day the car business is all about developing new products, and such new product planning is time consuming enough to begin with. For the Autoworkers Union obviously their members will have better and more secure jobs that way too. Fiat probably had to raise their price a bit to bridge whatever the gap was then as well. So now it is done.

Sergio Marchionne, the Chief Executive Officer of Fiat and Chairman and Chief Executive Officer of Chrysler Group, has worked hard, long and with consummate patience to bring this about, and he said with the announcement.

“The unified ownership structure will now allow us to fully execute our vision of creating a global automaker that is truly unique in terms of mix of experience, perspective and know-how – a solid and open organization that will ensure all employees a challenging and rewarding environment”.

The background leading up to it

Thirty four years ago Chrysler had previously been rescued by the American Government, with major loan guarantees that shored up its finances at the time. The company was then led to a tremendous resurgence by the charismatic Lee Iacocca; first with the K Car, and then the invention of the Minivan.

Both of these iconic vehicles were new categories, ones based on the same underlying engineering foundation, or “platform” in auto-industry speak, which gave them the cost advantages of scale they needed to succeed, as well as being properly sized for the economic needs of their customers at the time who were buying smaller cars in quantity not just during recessions for pretty much the first time in the United States.

Lee Iacocca later made a key acquisition of AMC, the American Motors Corporation, which was also a very troubled company. At the time it belonged to another European company, Renault, who had not done much with it, except for the reinvention of Jeep which it accomplished developing a completely new, modern, platform for it with a unitary body for the first time.

Jeep went on to grow beyond its roots as a military and agricultural vehicle and become a hugely successful brand all by itself. It did so with the invention and growth of another new automotive category for Chrysler, Sports Utility vehicles, or SUVs. These had been first made fashionable at that time by the original example of the Range Rover and then by its first direct copy the Ford Explorer, and the whole industry then followed. Today, Jeep is Chrysler’s biggest cash machine and they protect its franchise, its brand and its future very carefully.

In 1998 Chrysler entered into a merger with Daimler Benz, maker of Mercedes Benz cars. Billed at the time as a merger of equals it eventually proved to be a very unhappy marriage of convenience, which finally unraveled in 2007 when Daimler offloaded it to US private equity firm Cerberus. There had been a huge cultural chasm between Chrysler and Daimler during the time they were living together, one that was never successfully bridged.

In human terms it was a classic case study of how not to go about a merger, or acquisition as it really was despite having been billed originally as a merger of equals. Daimler Benz did not fully integrate Chrysler into its operating and upper management, and there was also a strong reluctance by the Germans to fully share the fruits of their research and development with their new American partner.

Hence there was no love lost between the companies when they eventually split up. Moreover, this was so even though the hand-picked CEO of Chrysler, whom Daimler Benz had themselves parachuted in, then went on to run Daimler Benz itself, Hans Dieter Zetsche. However the marriage did offer three important gifts to Chrysler before the divorce that are still important to the company seven years later, and now will be to Fiat as well.

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The three gifts from Daimler Benz that helped save Chrysler

The first was the gift at the time of the unibody platform underpinning the top selling Mercedes Benz SUV, known as the ML series, which became the platform for new, completely redesigned, versions of the Jeep Grand Cherokee, shoring up its position as Chrysler’s continuing most profitable product.

The second was the donation at the same time of the platform of their top selling mid-sized Mercedes Benz at the time, the E Class sedan. This became the underpinning for the initially very successful new Chrysler 300 sedan as well, with its gangster styling which has lasted surprisingly well.

And the third gift was the donation of the engine design and technology for their, then completely current, Mercedes Benz 3.5 litre V6 engine which Chrysler would go on to use in most of its larger offerings, and indeed still does today.

Undoubtedly these platforms and engine designs have diverged somewhat since, as both companies have gone on to develop their technology differently after going their separate ways. However they have been crucial both to Chrysler’s initial survival on its own, and also to Fiat’s interest in buying them in the first place – which is a very fundamental point to understand.

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Chrysler’s vehicle platforms being adapted for Europe

Vehicle platforms are key to understanding how a car company develops the products that it hopes will bring in the customers, and are also key to how much money they will make – have too many and you have no benefits of scale; have too few and you are going to miss out on a number of market segments.

Fiat has plenty of small car expertise of its own, but has no competitive modern volume large-car platforms having let them all age without investment over several lean years. In recent years small car margins have been squeezed into near oblivion by the arrival of competitive products from Eastern Europe, from South Korea and, increasingly, even from China looking forward as well.

Except for well-defended niches therefore, to make money you must also be able to leverage your brands into larger vehicles that consumers actually desire and will give you more margin, and this is the name of the game today for all auto manufacturers world wide. In part it is a zero sum game, at least in well-established markets, therefore it is one you must play to win.

With the availability of Chrysler’s large-car platforms, including that of the 300, Fiat has already begun to revitalize its European mid and large-car business under the iconic Maserati and Alfa Romeo brand names. These have both languished for years without the money to take full advantage of what has been their sometimes eternally elusive potential.

Two new full sized, and very lovely, four door Maserati sedans have recently been launched however, the latest Quattroporto and the very cleverly named Ghibli. The Ghibli used to be the name for a very beautiful coupé a long time ago designed by Giugiaro and which just about everybody over forty who likes cars remembers with some passion.

Both new cars have been very well received, and both are based on the Chrysler 300 as a donor platform, though nobody advertises the fact. Of course at least one modern Bentley comes from the Volkswagen Phaeton platform too, and nobody seems to mind. Larger cars, successfully done, obviously can carry much better margins than the mini cars Fiat has in recent years been mainly known for.

Fiat-Chrysler’s next large car for Europe, a more affordable Alfa Romeo Giulia will also have the same foundation and eventually lead to the re-launching of the brand in the United Sates through carefully selected Chrysler dealerships.

A drop-dead gorgeous small coupé model the Alfa 4C is already ready to go as their halo model for the brand, which has just been waiting for this full merger in order to be launched. Finally, an up-coming, radically styled, large Maserati SUV will take on the Porsche Cayenne directly, with its platform also borrowed from Chrysler, this time from the Grand Cherokee, as well.

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Fiat’s vehicle platforms being adapted for the United States

In the reverse direction, the mid-sized car platform of the current Alfa Giulietta has been, and will continue to be, adapted (and enlarged) for future Chrysler models for sale both in Europe as well as for North America. The first example has been the new Dodge Dart, which was in this writer’s opinion a little rushed with its rather bland styling, and hence has not been particularly successful though one imagines they will get it right eventually.

The next one up though is already becoming a major hit, with the reinvention of the just-launched and completely new Jeep Cherokee, which is one size down from its larger stable-mate the Grand Cherokee. It is gorgeous, true to its roots capable on road or off, and more affordable for its targeted customer base. And it runs the latest version of the V6 engine. It sits on a larger version of the Alfa Giulietta platform, which is intended now to spawn a number of additional mid sized products, both sedans and SUVs, moving forward, and for sale on both continents.

The launch of the new Cherokee was actually delayed for several months this summer, when the first several thousand vehicle manufactured were found to have a fault in the calibration of their spanking-new nine speed automatic transmission.

Rather than just sell them to customers anyway after discovering the problem, the new Chrysler sent engineers all across America to individually re-calibrate every single one of them wherever they were parked, and before any reached their customers. Now the transmissions do not “hunt” when they are searching for the best gear, which is a potential difficulty with so many gears available and a potential PR disaster has been turned into a possible triumph.

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Combining their engine technologies is really key

The need to continue to develop Chrysler’s engine technologies will be hugely helped by the presence of Ferrari in the Fiat group, with all its advanced technologies including, let it be said, hybrid internal combustion and electric technologies as currently show-cased in the latest Ferrari supercar “La Ferrari”.

Some of these capabiltities are already available in the larger V8 engines for the new Maserati sedans, which are indeed actually made by Ferrari though with a Maserati label slapped on them, and undoubtedly such benefits will trickle down to other Chrysler products as well. Maseratis will also use the smaller V6 engines coming from Chrylser, which were originally the gift of Mercedes Benz.

In small, fuel efficient, engine technologies for smaller cars Fiat already has world leadership in some areas, and especially for its “multi-air” family of fuel sipping small engines.

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The Chrysler bankruptcy

In 2007 American private equity firm Cerberus bought Chrysler from Daimler Benz in a fit of stock market hubris at precisely the wrong moment, just before American auto sales fell off a cliff with the financial crisis of 2007-2008.

This drove both General Motors and Chrysler into bankruptcy and prompted the rescue of both by the American Government, with Cerberus losing huge amounts of money and their stake.

GM and Chrysler have both since emerged from bankruptcy as successful companies again, to the full credit of President Obama and the US Government whose TARP programme – troubled assets relief programme – did a super job of giving them time to reorganize.

On the balance sheet side they have shed the massive legacy issues that had been holding them back. These included enormous debts, excessive wage costs for assembly line workers, and their huge unfunded pension and retiree health obligations to thousands of former employees from the days when they were much larger companies.

These issues had previously held both companies back in terms of basic competitiveness for a long time, as foreign car companies had continued to invade their space in the previous thirty years or so. This was also a time when, it must be said, their design, manufacturing, fuel efficiency and quality were all pretty terrible too which didn’t help.

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Chrysler is rescued by Fiat

The successful reemergence of both companies has proceeded differently in each case. As we have seen Chrysler itself has been rescued by Fiat in yet another cross-cultural marriage, but this time with Italians rather than Germans. After the bankruptcy Fiat bought an initial stake, obtained the rights to manage the company and gradually increased their stake along the way to its current 59%.

This time however, and after huge initial skepticism from just about everybody, the combination has become hugely successful, for reasons we shall describe below and is a triumph of what can be done when people really do put their minds to it.

The total cash investment by Fiat’s own treasury for their 100% ownership by the time the deal closes on January 20th, 20124 will be just US$3.7 billion. The result will be a company with a combined annual output of 4.5 million vehicles in 2012.

A return to growth in the US market has preceded that in Europe, so even though it has been Fiat which rescued Chrysler now it will be Chrysler’s cash flow returning the favour as Fiat itself rebuilds for the next business cycle, and does so on a healthier basis, with modern products and a more profitable mix of vehicles as well

They say necessity is the mother of invention. One overriding reason for the success of this business combination, at this particular juncture in history, and which drove much of the behaviours of the participants, lies in the simple fact of necessity. Fiat really needed it to work as much as Chrysler did, being also in major difficulty themselves back home in Europe, and for similar reasons. When you really need something you are going to work much harder to achieve it, and take greater care over doing it right. Fiat and Chrysler have done both and it has succeeded.

Fiat also had an earlier, unsuccessful, example to go by, and to learn from, and likely benefited from the experience of having held cross shareholdings with General Motors itself earlier in a cooperation arrangement, which also included establishing platform-sharing arrangements.

Even today some of GM’s small European Opels still share Fiat platforms and there was at one point a joint engine and transmission venture which was unwound when they split apart again.

The cross shareholdings were unraveled – at a cost to GM of about US$2 billion in 2005 – when they were forced by the courts to buy out a put-option, with which Fiat appeared to have the right to sell itself to them at one point given the language of an earlier master agreement. In those years Fiat had certainly been considering potentially exiting the car business entirely as it had progressively continued to dwindle as a force in its domestic Italian market, where it had made most of its money for so long.

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John Elkann and Sergio Marchionne

After Gianni Agnelli’s death in 2003 the mantle of leadership for the whole Fiat empire fell on his grandson John Elkann who is today Chairman of Exor, the Fiat family holding company.

Intelligent, modest, young, trained as an engineer, John Elkann has had big shoes to fill as the new “capo” of the family holdings, which include major interests outside of Fiat as well. To run Fiat however he has had enormous help in Sergio Marchionne who is Chief Executive Officer of both Fiat and of Chrysler and, if you like, in practice the senior “consigliere” to the new generation.

Marchionne’s approach to Chrysler has been nothing less than supremely competent, measured, down to earth, hands on and to date very successful. Handed a very weak hand at Chrysler at the beginning, he has turned the company around with critical focus on a number of core issues, including carefully upgraded the interiors of many vehicles initially until he had the cash flow to replace them.

He has been aided considerably by the eventual turn around of auto sales in the US that has since taken place, to be sure; in what is supremely a volume business, volume can help cover up a lot of sins, and give you time to get things right, and this is what has happened.

Once the deal closes on Jenuary 20th, a new chapter begins; for Fiat and Chrysler and, as well, for Sergio Marchionne and John Elkann as well. They deserve applause for bringing the business forward already to this point and, hopefully, for what they will do with it next.

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About John Elkann

John Elkann was born in New York, United States., the first son of Alain Elkann, a writer and journalist and Margherita Agnelli, daughter of Gianni Agnelli, owner of the giant Italian Fiat Group.

As a boy, Elkann lived in the UK as well as in Brazil, later attended high school in Paris, and went to University in Italy. As a result he is today fluent in four leading European languages, Portuguese, English, French and Italian. Elkann graduated from the Politecnico di Torino with a degree in management engineering in 2000.

After gaining considerable experience working in various industry sectors, John Elkann joined Fiat in 2002, and when his grandfather Gianni Agnelli passed away in 2003, and his great-uncle Umberto Agnelli the following year, Elkann was promoted to the role of Vice Chairman of Fiat, and in 2010, John Elkann was named as Chairman of the Board.

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