The merger deal looked great. The automotive industry was optimistic and excited. Fiat Chrysler (FCA) was going to merge with Renault and this was going to be one of the biggest mergers in the auto industry history. But a week after the deal being proposed, FCA took it off the table. The deal died even before taking off from the ground. What went wrong? Who is to blame for this blunder? We looked and researched deeply to find the answers as to why what some experts considered as the “merger of the century” crashed and burned even before taking off.
Reasons for the merger
A 50:50 “merger of equals” was proposed by Fiat Chrysler, which would result in the creation of third-biggest automaker company in the world with 8.7 million vehicle sales, just after Volkswagen and Toyota.
Fiat, an Italian- American automotive company, in its released press statement, said that this merger would create a “world leader in the rapidly changing automotive industry with a strong position in transforming technologies, including electrification and autonomous driving”.
In the US market, Fiat Chrysler has some very popular SUV brands like Ram Truck and Jeep. While Fiat’s presence in Europe market is not as strong as it was in its early days, people still prefer its premium version cars such as Maserrati and Alfa Romeo. On the other hand, Renault is quite a popular car brand in Europe and is known for making small and inexpensive cars. The alliance with Nissan has helped it to gain a strong foothold in the Asian market as well. What FCA really wanted from Renault was a headstart in the field of Electric vehicles (EV). Renault with its already existing merger with Nissan and Mitsubishi has sold 500000 EVs since 2010 and is quite a capital player in the field of electrical and self-automated cars.
Indeed one of the main facets of the deal was sharing R&D costs relating to self-driven and electric cars. Fiat has always been an old school with its cars but has recently realized that in the current environment where there has been a lot of pressure on automotive companies to go green, being old school could prove to be quite expensive. The European Union has passed some tough carbon emissions standards for automakers and there are hefty penalties for not complying with them. And compliance with these regulations was a big reason why FCA wanted this deal: to gain better access to EV technology.
The FCA-Renault merger hoped to save every year around euro 5 billion from synergy and sharing of technology and common components cost. This savings in cost would be extremely helpful in case of a sales downturn, a scenario that the automotive industry is facing recently.
The combined business was to be split equally between the two companies and a group of 11 members was to be selected on the board, most of which were independent. Also both companies got equal representation of four members on the Board along with one nominee director from Nissan.
The trouble with the merger
There were a number of reasons why the FCA-Renault merger never took off.
France government is the biggest Shareholder of Renault, owning more than 15% of the stake. Japanese automobile company Nissan owns 15% of the non-voting stake while Renault owns 43% of Nissan’s shares as well. The proposed merger would have decreased French Government’s share by half (7.5%) for which it not only requested a hefty compensation but also demanded its representative on the Board. Not only that, it also raised a list of nationalistic demands. There was to be no closure of factories in the country nor any French worker could lose his job if the merger was to go ahead. The Government also wanted the Headquarters of the newly formed company to be located in France.
Another factor that led to the cancellation of this merger was the strenuous relationship of Renault with Nissan. The relationship had worsened after the arrest of Nissan’s chairman Carlos Ghosn last November on income escaping and corruption charges. Ghosn was a vital asset for Renault before its merger with Nissan (second in command) and played a crucial role in rescuing Nissan from the financial disaster and turning it back into a profit-making company. The former head of Nissan prior to this scandal was regarded as a national hero but fell from everyone’s grace after the fiasco.
Reports suggest that Nissan was not informed of the deal until a week before it went public. Nissan saw it as a betrayal of trust and felt it deserved to be informed and be involved in any deal that was as large scale as this merger. And initially, even though it didn’t object to the merger, later the company expressed a lot of reservations that went unaddressed by Renault. Chief Executive officer of Nissan, Hiroto Saikawa soon issued a statement cum warning, saying that the merger would “require a fundamental review of the existing relationship” to make sure that Nissan’s interests were protected.
And because of the above reasons, Nissan refused to vote at the FCA and Renault merger proceedings. French Government thought this abstinence to be Nissan’s disapproval of the deal and also realized that the FCA- Renault deal would put their relationship with Nissan in jeopardy. It now demanded more time to review the merger and declared that it wouldn’t go ahead with the merger unless Nissan was on board with this whole arrangement.
That proved to be the last straw for Fiat Chrysler. It knew that the deal was going nowhere as they were facing a voting deadlock which wasn’t going to be resolved in the near future.
Fiat broke off the deal and withdrew the offer. The merger died a week after it was announced. the share prices of both Renault and Fiat Chrysler fell significantly.
Had this $40 billion deal been successful, it would have been a winner for both the parties. And if Nissan had agreed with it, it would have lead to the creation of the biggest automaker company in the whole world.
Reactions to the merger break-off
Fiat was quick in blaming France for the failure of this much sought after the merger. In a statement, it said that “FCA remains firmly convinced of the compelling, transformational rationale of a proposal that has been widely appreciated since it was submitted, the structure and terms of which were carefully balanced to deliver substantial benefits to all parties”.
“However It has become clear that the political conditions in France do not currently exist for such a combination to proceed successfully”.
“When politics tries to intervene in economic procedures, they don’t always behave correctly, I don’t want to say anymore, ”Luigi Di Maio, deputy Prime Minister of Italy said in an interview.
Renault also expressed its disappointment in its press release saying: “We are gratified by the constructive approach of Nissan and wish to thank FCA for their efforts and Renault’s board of directors for its continued confidence.
“We view the opportunity as timely, having compelling industrial logic and great financial merit, and which would result in a European-based global auto powerhouse.”
The French officials retaliated and blamed Fiat for putting “massive pressure” on France to go through with the deal. They claimed that Fiat Chrysler tried to rush the whole process and forced Renault to either quickly take the offer or leave it.
Later, they softened their stance giving hints that there was still some chance for a revival of this merger deal.
Would there be a revival of the merger deal?
Usually there are positive changes for a merger deal talk to be revived, but in this case, everything happened so quickly that chance of it happening seems bleak.
Politics in France has been quite tense currently. Any deal like this was a great risk and it indeed proved to be so. France has been plagued with a growing number of yellow-vest protests all over the country due to increased layoffs and poor job security. That’s why France tried to protect its interest first before giving this deal a green flag.
Fiat Chrysler is still looking for a partner for the deal. So will this deal be revived? Mostly, no. Fiat now knows that joining nationalism with business is not a good choice and in case of Renault, that’s what is happening. The French Government is trying too hard to appease everyone and that’s not how it works usually in business deals. Some parties get the short straw and compromise, it’s hard to please everyone. But with France’s please-all stance, that seems to be not possible. So, will this deal happen? Probably not. But will a deal happen? There are strong chances that Fiat would be looking for another prospective merger partner. In fact, it has been looking for a merger partner for quite some time and earlier there were talks with PSA group, the manufacturer of Peugeot.
Recent revival of merger deal news
Fiat and Renault have been trying to rework the deal recently so that there could be a revival of the merger that’s accepted by all. However, there are few obstacles present that still need to be managed such as Nissan’s agreement, too much involvement by the French Government and few executives in Fiat that are in favor of its merger with the rival group PSA. Fiat’s CEO, Mike Manley, indicated that the company was still interested in a deal with Renault but didn’t state any solutions that could help with the problems that originally crashed the deal.
Some Industry experts believe that at this point gaining Nissan’s support is crucial while others want Renault to sell its stake in Nissan if it wants the merger to go through. Some experts on the other hand believe that Renault should mend its strained relationship with Nissan before undertaking any such agreement. Nissan has been its partner for over 20 years and not paying attention to these troubles might harm Renault heavily in the future. That’s why these industry experts are favoring FCA merger with PSA group. And even though French Government owns 13% of the stake in that company as well, it hasn’t shown any interest regarding that deal yet.
Will the FCA-Renault merger break off affect Renault’s relationship with Nissan?
The short answer is yes. The relationship of Renault with Nissan was already strained due to a number of reasons for a long time. With the arrest of Carlos Ghosn, the situation worsened. Ghosn, who is currently out on bail in Japan openly blamed the Nissan executives to “plot and treason” against him as they were not satisfied with his plans to deepen the company’s integration with Renault.
And even though French Government is globally criticized for failure of the merger deal, in Renault the anger is mainly directed towards Nissan. An inside report revealed that Renault blocked passing off a resolution in Nissan that would reform its corporate structure and prevent another incidence similar to Carlos Ghosn occurring again. A ⅔ majority was needed to pass the motion and Renault owns over 43% of its shares. There have been quite some rumors that the Nissan Renault partnership might be finally coming to an end. And while we can’t say for sure, the writing is clearly on the wall and has been there for quite some time.
The collapsing of the merger deal between Renault and FCA came as a shock to the automotive industry. The experts supported the deal as they believed that each side could benefit greatly from it. This merger could have helped the auto industry greatly as well which is facing a global slowdown when it comes to sales and growth of the operations. In addition, it is also experiencing extreme pressures from governments all over the world to develop more effective and clean future technologies. With the merger, there could have been significant savings in cost while investing in future costly technologies.