Italian-American automaker Fiat Chrysler Automobiles (FCA) has released a non-binding letter to French auto manufacturer Renault proposing a merger of their businesses, with shareholders of both the companies owning 50 percent each of the combined business. If this deal goes through, the resulting company would be the third-largest global original equipment manufacturer (OEM) of automobiles and light-duty trucks, with 8.7 million vehicle sales annually and a strong market presence across key geographic regions across the world.
The discussion has been ongoing for at least the last few weeks, as uncovered by CNBC this weekend. As of now, the idea of a merger seems to have been positively received at both companies. During the recent earnings call, Mike Manley, the CEO of Fiat Chrysler, hinted at a potential merger possibility with another OEM, saying that the company is “going into an environment where there are going to be opportunities.”
Such a partnership between the two major automakers would turn out to be beneficial for both, because it will increase their resources to develop futuristic auto technology – be it electric vehicles (EVs) or autonomous driving vehicles (AVs). Such efforts will need all hands on deck, and for these companies to catch up to the market leaders in the cutting-edge EV and AV space, merging their futuristic technology programs would be a prudent move.
FCA’s proposal calls for equal ownership between both FCA and Renault shareholders, creating a balanced governance structure with the majority of the board of directors being independent. The proposal is a natural extension of the discussions between the companies, which made it clear that a merger would “substantially improve capital efficiency and the speed of product development.”
The FCA proposal states that the merger would pave the way for bolder company-wide decisions in the face of the auto industry’s transformation in the connectivity, electrification and autonomous driving verticals.
“The benefits of the proposed transaction are not predicated on plant closures, but would be achieved through more capital-efficient investment in common global vehicle platforms, architectures, powertrains and technologies. FCA has a history of successfully combining OEMs with disparate cultures to create strong leadership teams and organizations dedicated to a single purpose,” said FCA in its statement. “FCA’s Board strongly believes that this combination, which would have the scale, expertise and resources to navigate the rapidly changing automotive industry, would create new opportunities for employees of both companies and for other key stakeholders.”
Following the announcement, shares of FCA and Renault jumped by 19 percent and 17 percent respectively in the early hours of May 27. Though their share prices have retreated by a few percentage points since then, it still ranges significantly higher than at the day’s close on May 24.
With a new merger option available, Renault’s pursuit of a partnership with Nissan might run cold. Though both the companies have a patched up alliance along with Mitsubishi, the relationship has been rocky since the arrest of the venture’s former CEO, Carlos Ghosn in 2018, in connection to financial crimes he committed while serving as the CEO of Nissan.
However, it is interesting to note that the FCA proposal mentions its interest to work with the “combined enterprise” of Renault, Nissan and Mitsubishi, explaining that such a partnership will be the largest OEM alliance of its kind in the world. Nonetheless, the merger proposal is in no way finalized and will be subject to negotiation and approval by the FCA and Renault management boards.