Why talk of GM-FCA tie-up just won't die

DETROIT -- Few auto industry pundits seem to be taking Sergio Marchionne's awkwardly public pursuit of a merger with General Motors very seriously.

Executives at rival companies sniff privately that the Fiat Chrysler Automobiles CEO's industry-consolidation drumbeat signals desperation. GM CEO Mary Barra couldn't dismiss the idea quickly enough. Even the Wall Street analysts who say it's worth a look are doubtful that he can force GM to the table.

And yet, there must be some reason why the idea keeps resurfacing.

This is at least the third time in the past eight years that executives have kicked the tires on a GM-Chrysler combination. That recent history of flirtation, along with flush equity markets and Marchionne's track record of rare success on a major automotive merger, seem to be enough to keep the idea alive.

With both companies stumbling toward bankruptcy in 2008 and 2009, GM execs were tantalized by an estimated $7 billion in annual cost savings from a Chrysler hookup, then-GM Vice Chairman Bob Lutz told Automotive News this month. (That's the same order of magnitude as the roughly $5 billion in synergies that Marchionne said would flow from FCA's combination with "another large OEM," according to a presentation he outlined in April.)

GM also was interested in early 2007, when Daimler was looking to end its failed marriage with Chrysler. Lutz said that dalliance included discussions between then-GM CEO Rick Wagoner and Daimler AG CEO Dieter Zetsche. Joint committees examined everything from product planning and platform consolidation to potential plant closures, Lutz said.

The idea was to meld the best of Chrysler and GM, from engineering and purchasing to the legal departments, Lutz said.

"The operating people were all for it because we could see the savings," Lutz said. "We would pick up all that volume, but you wouldn't pick up all of the fixed costs."

Beyond cost cutting, there were compelling product possibilities that remain true today, Lutz said. The bread-and-butter full-size pickup brands -- Chevrolet Silverado, GMC Sierra and Ram -- could have adopted common architectures. Rear-wheel-drive car architectures could be combined. Jeep could have gotten a body-on-frame large SUV.

Ultimately, the board thought it unwise to double down on a cash-strapped company that was also stuck with UAW legacy costs, Lutz said.

Of course, today, any full merger would include a Fiat company suffering from excess capacity in Europe and scant presence in China, among other problems. Still, some observers see intriguing possibilities in a partial or full merger, even if the path appears almost impassable.

Max Warburton, a Singapore-based analyst at Bernstein Research, believes that FCA could credibly build a case for annual cost savings far greater than $5 billion -- maybe even double that.

Beyond powertrain and vehicle-platform consolidation, savings would flow from combining the companies' North American production and distribution channels, Warburton wrote in a June 11 report for investors. They could eliminate overlap in Latin America, where GM and Fiat are strong but suffering from market disruptions. Opel and Fiat could be combined in Europe.

Risks abound, of course. Antitrust scrutiny would likely loom in many regions -- especially in the U.S., where a combined GM-FCA would be dominant in trucks. Cultural clashes between Opel and Fiat could be epic. And GM's largest venture partner in China, SAIC, could thwart the deal.

What's more, Marchionne's options for getting GM to the table are limited, and all long shots. Marchionne reportedly has reached out to activist investors to help engage GM (a notion he seemed to dismiss last week, saying FCA is "very far removed" from any formal move on GM). He could try to get onto GM's board by buying a small stake in the company, though that also could trigger antitrust scrutiny.

And he could launch a hostile bid. But it would have to be all equity because FCA doesn't have cash to offer, Warburton says. A successful all-equity hostile takeover of a larger company by a smaller one would be unprecedented -- in any industry, he says.

Ultimately, Marchionne's only shot is to sell large GM investors on FCA's most important asset: Marchionne himself, and the promise of greater profitability down the road, Warburton says. The analyst believes the mechanics of a merger "look wild -- but not impossible."

He concludes: "We believe it's necessary to start taking this idea more seriously."