Tuesday's Wall Street Journal reported that Fiat would take a stake in Chrysler (see "Fiat Nears Stake in Chrysler"). In it, the WSJ reports that Fiat will receive a 35% stake in Chrysler, without having to commit any capital to the deal. Instead, Fiat has agreed to retool an existing Chrysler plant to be able to manufacture Fiat vehicles for sale in the U.S. In addition, Chrysler will receive engine, transmission, and small-car platform technology from Fiat.
Prima facie, the deal looks like it makes some sense - Fiat gets access to U.S. markets (a market it exited in failure years ago) without having to incur the investment of starting up an operation from scratch, and Chrysler gets better access to European markets (which it lost after its failed deal with Daimler). Moreover, Chrysler gets access to small-car and fuel-efficient engine technology while Fiat gains access to Chrysler’s Jeep and Minivan brands.
As a Chrysler creditor (a U.S. taxpayer), anything that increases the likelihood, even infinitesimally, of receiving a return on my investment makes me happy. The U.S. taxpayer (and by corollary, the U.S. government) should therefore be positively predisposed toward this deal, taking comfort in the fact that, at the very least, in exchange for a 35% ownership stake in Chrysler, Fiat should be commensurately responsible for 35% of the liabilities. This should come as welcome news, assuming Fiat can keep Chrysler viable long enough to repay the U.S. government.
So, that’s my take on the deal from a U.S. taxpayer perspective, although I am awaiting more details in order to be able to make a better evaluation of the terms of the deal.
As an organizational scholar however, I can’t help but wonder if the deal improves either, or both, firms in the long run. As I have mentioned before, I am generally not a fan of deals that combine two weak firms, and this is exactly what you would have in this instance (See, "GM + Chrysler = Ugh!," and "Near an Agreement" for background). For this reason, the ex-ante probability of success is low.
While on the surface there seem to be some synergies, you are effectively wedding a firm that as little as two years ago seemed to be on the brink of extinction (Fiat) with one that is now on life support (Chrysler). Although Fiat has produced some interesting products over the past few years, it is still in too fragile a state to tackle another entry into the U.S. market (the most competitive auto market in the world). Moreover, Fiat is not prepared for what it is about to get into by acquiring a stake in Chrysler.
Personally, I can’t believe that signing up for 35% of the liabilities of Chrysler would not be enough to scare off Fiat, or any other potential investor for that matter.
But who am I to object - Caveat Emptor.