12/18/2019 | 2 MINUTE READ

PSA, Fiat Chrysler Agree to Merge

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The auto industry contemplates its biggest merger ever, as Fiat Chrysler Automobiles and PSA Group formally agree to $47 billion deal.

This week’s biggest auto industry news is that the boards of carmakers Fiat Chrysler Automobiles and PSA Group have, as expected, formally agreed to merge.

The binding, $47 billion deal would be the auto industry’s largest ever, eclipsing, ironically, Daimler’s failed $35 billion acquisition of Chrysler in 1998.

Out of the combination will come an automotive giant with annual sales of 8.7 million vehicles and revenue of some €170 billion ($190 billion). It will be the world’s third-largest carmaker by revenue (after Volkswagen Group and Toyota) and fourth-largest by unit sales (after VW, Toyota and the Nissan-Renault-Mitsubishi alliance).

And yes, those stats mean that General Motors—once the world’s largest carmaker—will rank fifth in unit sales.

It’s All About Balance

The merger partners have gone to great lengths to create a true 50:50 entity with balanced ownership and power.

The unnamed new company will be run by CEO Carlos Tavares, currently CEO of Peugeot/Citroen maker PSA. The whole thing will be chaired by John Elkann, currently chairman of FCA, and governed by an 11-member board with a majority of outside directors. (It isn’t clear what role will be played by Mike Manley, the current CEO of FCA.)

The partner companies estimate their merger will produce annual savings of €3.7 billion ($4.1 billion) through synergies that won’t close any plants. The top managers of both companies have track records of successfully reviving their own companies and orchestrating smaller mergers.

What About the Fine Print?

Both companies are shrugging off a trio of complications to the deal, dismissing them as inconsequential. We’ll see. These are the three notable issues:

The China Connection. Currently, Dongfeng Motor owns 12% of PSA. That holding will drop to 4.5% when the merger dust settles. But it still could raise antitrust issues in the U.S., where the Trump administration has been very particular about Chinese access to American intellectual property.

GM’s Racketeering Lawsuit. Last month GM filed a lawsuit claiming that FCA had bribed United Auto Workers union officials for years to ensure favorable labor deals. The racketeering complaint was inspired by a continuing federal corruption probe that has focused on FCA and the UAW. The lawsuit names three former FCA executives already convicted, and it asserts that the late Sergio Marchionne, then CEO of FCA, personally approved the payoffs.

Italian Taxes. FCA is trying to clean up a claim by the Italian government that the company owes roughly $1.5 billion in back taxes resulting when Fiat acquired Chrysler in 2014 and moved the new company’s headquarters from Italy to the Netherlands.

Stay tuned. We’ll be back as further details emerge.

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