Fiat Chrysler (FCAU) CEO Sergio Marchionne doesn’t like taking no for an answer. He desperately wants Fiat to be one with General Motors (GM), and he wants the world to know.
Marchionne’s feelings are clearly unrequited, and so now the question becomes: Will FCAU launch a tender offer for GM stock?
Wall Street seems to think that there’s a distinct possibility, as GM stock is up a modest 1.8% today and FCAU shares are trading nearly 2% lower — a typical price dynamic when the former company is expected to be snapped up by the latter.
Let’s take a look at what the Italian-Canadian Marchionne sees in GM … and why GM isn’t warming up to his advances.
Fiat Likes ‘Em Big
If Fiat Chrysler were to merge with General Motors, it would create the single largest automaker by revenue in the world. GM and FCAU boast a combined $270 billion in revenue in the trailing twelve months, more than Volkswagen’s (VLKAY) $212 billion, Toyota‘s (TM) $231 billion and Honda’s (HMC) $116 billion.
Tesla (TSLA), if you were wondering, also still has a way’s to go before Marchionne gets the hots for Elon Musk’s brainchild, which posted $3.7 billion in revenue in the last 12 months.
But the allure of the FCAU-GM stock deal on paper is about the bottom line, not the top line. Marchionne has made it very clear that there are “synergies” to be had from a mega-merger. In fact, Fiat’s CEO made the case rather forcefully in an interview yesterday with Automotive News:
“‘Look, the combined entity can make $30 billion a year in cash. Thirty. Just think about that [expletive] number,’ he said. ‘In steady-state environments, it’ll make me $28 to $30 billion,’ at a seasonally adjusted annual selling rate of 17 million.”
It took GM just hours to review the proposal from FCAU, according to USA Today. They’re not interested. They haven’t been interested since March, when Marchionne dropped Marry Barra, the CEO of General Motors, an unsolicited email. The topic: Why don’t the two of us merge?
Since then, Barra has suffered through several similar advances from FCAU, insisting each time that GM is perfectly happy being single:
“We have scale, and we’re leveraging that scale,” she said. “For the last couple of years, we have really been merging with ourselves.”
Barra said that before the General Motors shareholders meeting in June, issuing what most corporate onlookers might call a very polite ultimatum.
Although Marchionne acknowledged in the Automotive News interview yesterday that merging with GM would be a cultural and managerial challenge of epic proportions, his case remains the same: GM’s business is too large for him to care about politeness.
“This is not a question of telling me to screw off. I understand [GM’s] desire to be alone and execute [its] plan. I’ve listened to the comments … ‘we’re still merging with ourselves,’ which I do not buy for a company that is 107 years old. You can’t merge with yourself.”
With the brash FCAU CEO adding that “I can hug you nicely, I can hug you tightly,” I wouldn’t be surprised to see the two sides at least enter serious talks.
An outright hostile bid, however probably wouldn’t be in the best interests of FCAU investors. That’s because General Motors has a market capitalization of $46 billion, and Fiat had just $22 billion in cash on its books at the end of last quarter.
It certainly can’t afford a flat-out buyout, and even a merger will stretch it thin, especially considering GM shareholders would demand some sort of premium. In 1998, Daimler-Benz merged with Chrysler, but it had to shell out a 19% premium to do so.
At the end of the day, Marchionne talks a big game, and GM clearly isn’t impressed or interested. It’s time for Fiat to put its money where its mouth is. I wouldn’t try to make a merger arbitrage play on this one, as it’s doubtful Fiat has an elephant gun big enough to bag this pachyderm.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
