You win some, you win some.
This week, The Wall Street Journal reported that Fiat Chrysler CEO Sergio Marchionne was searching for investors to help him strong-arm a merger with General Motors.
While this might not be the best idea for Fiat Chrysler, Citi analysts say it’s good news for GM investors. “It will be interesting, but arguably either outcome could end up positive for GM shares,” says the report.
According to Citi, GM is already in a solid market position:
Perhaps the pursuit speaks to the quality of GM’s global franchise. Perhaps it’s because GM may actually be ahead in the mass-market auto OEM “tech race” to accelerate connectivity (OnStar/LTE, which we’ve previously valued at $US7-9bln), electric vehicles (Volt/Bolt), ADAS, autonomous driving (SuperCruise), infotainment, China luxury gains etc.
These strengths and the company’s belief in the future of its business led to GM CEO Mary Barra announcing twice in two months that GM is rejecting the merger deal. Despite the rebuffing, Marchionne seems persistent and could keep trying to build a stronger case for a merger by wrangling in more hedge funds and investors for his bid. For GM shareholders, however, his success or failure really doesn’t matter.
Victory in consolidation
On one hand, a merger could bring some advantages.
“In a spreadsheet the entire automotive industry could benefit from consolidation and this isn’t a new discussion,” says an earlier Citi note on the industry. Streamlining the production of new parts for purposes such as cutting emissions, in-car connectivity and passenger safety was cited in a presentation made by Fiat Chrysler as a reason consolidation makes sense.
Convincing GM management and shareholders the advantages make sense has so far proved difficult, and the note states that a deal would have to be weighted in GM’s favour to be accepted. The note says the second option is that “an M&A deal is structured to win strong GM shareholder support thereby furthering our view that GM should end up trading at a premium to Ford.”
So far it seems as if GM is content to continue business as usual and stay independent. Citi’s analysis says this approach exudes confidence in the business plan of the future and should encourage investors about the strength of the company.
Over the past few weeks since the original attempt at consolidation, Barra has been reiterating this independent position every time it comes up.
“There was an email that was very much vetted with management and our board. And after we reviewed that, we are committed to our plan,” said Barra at a news conference.
Barra also said that internal consolidation and streamlining already provides the opportunities that consolidation with Fiat does. By vehemently rejecting the deal, Barra and GM executives are sending the message to investors that GM can thrive on its own.
While Marchionne’s dogged pursuit of the deal might not end in success, the outcome shouldn’t matter to GM shareholders. It’s his effort that counts.