VW Diesel Scandal Bolsters Marchionne's Campaign for MergersTommaso Ebhardt
Fiat investor expects combinations `once dust is settled'
Marchionne cites costs to meet emission rules in merger plea
Regulators in the U.S. and around the world are set to tighten scrutiny after VW admitted to rigging diesel engines for years to circumvent pollution tests in the U.S. That could raise the costs needed to develop cleaner technology. As it is, the strain of meeting guidelines and making a profit was evidently already enough to prompt Volkswagen to cheat.
“Inevitably, VW’s issue creates the conditions for a reshuffle of assets that may lead to mergers among carmakers once the dust of the scandal is settled,” said Emanuele Vizzini, who helps manage 3.6 billion euros ($4 billion) as chief investment officer at Investitori Sgr in Milan, including FCA shares. “We expect Fiat to be an active player helped by the positive momentum of its business.”
Marchionne, 63, has been crusading for combinations for a year, highlighted by his April presentation called “Confessions of a Capital Junkie.” He argues that automakers waste money by developing multiple versions of the same technology, such as emission and safety controls, and combining would help by spreading those costs across more vehicles. So far his mantra has been ignored by peers, with his preferred partner General Motors Co. saying it’s strong enough to stand alone. Maintaining resistance might now get tougher.
“There is now clearly a risk that with regulators investigating all carmakers, even were they all fully compliant,” said Kristina Church, a London-based analyst at Barclays, said in a note. “They could conclude that the only way to mitigate future issues” is by imposing a tougher testing procedure.
Marchionne made that very point in his April presentation, saying that capital spending by carmakers will rise in the coming years, partly because of the “push that emission regulation is imposing on the industry.” Sharing costs through mergers is the only way for volume producers to boost their “poor” results, he said in April.
Marchionne has since focused his attention on GM, which is more than twice the size of Fiat Chrysler, the carmaker he created in 2014 from the merger of Italy’s Fiat and U.S. counterpart Chrysler. The two companies share multibrand strategies. Also, GM lacks a dominant shareholder to defend it like Ford Motor Co. and Volkswagen. GM’s biggest investor is a trust of the United Autoworkers labor union, which holds about 8.9 percent.
Fiat Chrysler representatives declined to comment on whether the VW case would accelerate a partner search. Chairman John Elkann told reporters in Rome on Thursday that mergers would be necessary even if the scandal hadn’t come to light. "The case for consolidation is valid and remains valid regardless of what is happening to VW," Elkann said. The VW issue is "very serious," he added.
Marchionne has been working with an advisory firm to gauge investor interest in pushing for a combination of FCA and GM and to evaluate possible alternatives, people familiar with the matter said in June. At the time, Volkswagen was one of his possible alternatives, according to the people. The German company has the world’s highest research and development budget, data compiled by Bloomberg show.
“VW is very much out of the running” as a Fiat Chrysler partner, said George Galliers, an analyst at Evercore ISI in London. “If VW didn’t believe that acquiring FCA’s business would fix their U.S. problems earlier in the year, I am not sure why they would suddenly feel that they need FCA to fix them now.”
Any further push by Marchionne for a merger is unlikely before the beginning of next year, after Fiat Chrysler spins off its Ferrari supercar division, as the Italian-American automaker could use the cash from the move. By that time, the industry will have had to grapple with the broader impact of the VW scandal, potentially making peers more receptive to the executive’s pitch.
“Marchionne’s push for a combination is more than timely,” said Giuseppe Berta, a professor at Bocconi University and the former head of Fiat’s archives. “He should push for a merger with GM soon after the separation of Ferrari to leverage a weaker Volkswagen to gain customers.”