Fiat and Chrysler Play Chicken Over IPO

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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The Fiat-Chrysler deal has entered a new financial transaction into the annals of finance: the involuntary initial public offering. Basically, when the U.S. bailed out Chrysler Group LLC, it handed over the company to Fiat SpA (the majority owner, with almost 60 percent), and the United Auto Workers retiree benefits trust (VEBA), which owns a little more than 40 percent. The idea was that Fiat and Chrysler would create fantastic synergies, the company would become wildly profitable, and then the VEBA would sell out to Fiat, making the trust whole. It was a good deal for Fiat, since Uncle Sam weighed in pretty heavily to stiff the creditors, and a good deal for the retirees, who otherwise would have gotten very little.

But after several quarters of profits, the VEBA wants to cash out -- at a higher price than Fiat seems willing to pay. So it's putting its shares on the open market in the hopes that this will fetch a higher price. Fiat is not thrilled about this. Besides the obvious reasons, it will find it harder to tap the accumulating wads of cash on Chrysler's balance sheet. But it's not quite sad enough to offer the VEBA more money.

If you want to understand the underlying dynamic, picture a Fiat 500 playing chicken with an elderly Dodge Neon. An IPO carries big risks for both sides: Fiat could end up with thousands of unwanted minority partners clogging up its balance-sheet consolidation, while the VEBA might find that with Fiat, the obvious buyer, staying out of the market, demand for its shares is anemic. So neither side is too interested in actually getting to the denouement; rather, they're hoping the other side blinks. Fun for spectators, maybe, but not great for either of the participants, or the vehicles they're driving.

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