GOKHALE INSTITUTE OF

POLITICS AND ECONOMICS

FIAT – CHRYSLER MERGER

STRATEGIC FINANCE AND INVESTMENT

BANKING

AFFAN AHMED: FE1902

AKSHAT CHANDRA DUBEY: FE 1906
ANKIT PARSON: FE1908
NAMAN SONI: FE 1921
NISHANT SHARMA: FE 1922
Merger Analysis Fiat Chrysler

ACKNOWLEDGEMENT

We are grateful to have completed the project and would like to thank the people without whom this
undertaking would have not been completed. The contributions are greatly appreciated and
acknowledged. The group would love to express their appreciation and indebtedness to the
following:
CA Mr. Atul Kulkarni, for providing insights into various case studies, and GIPE administration for
co-operating throughout.
To all the friends and relatives who in one way or another shared their support morally.
We thank you!

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Merger Analysis Fiat Chrysler

Table of Contents
Introduction ............................................................................................................................................... 3
The companies ........................................................................................................................................... 3
Fiat ............................................................................................................................................................. 3
Chrysler .................................................................................................................................................... 4
Culmination ................................................................................................................................................ 5
Reasons and deal structure ...................................................................................................................... 5
Management ............................................................................................................................................ 6
Benefits and Synergies ............................................................................................................................. 6
Norms ........................................................................................................................................................ 7
Partner fit ........................................................................................................................................ 8
Organizational Structure ....................................................................................................................... 12
8 I’s of Successful Alliance ...................................................................................................................... 13
Valuation ................................................................................................................................................... 14
Post-merger Scenario .............................................................................................................................. 17
Observations............................................................................................................................................. 19

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Merger Analysis Fiat Chrysler

Fiat – Chrysler Merger

29-12-2020

Introduction
In 2009, Fiat was facing issues in meeting its sales targets, a contraction in revenues and a drop in domestic
demand due to the global financial crisis of 2008. Fiat group required a proper review of the previous strategies
such as targeted alliances and come up with a restructuring plan. On the other hand, Chrysler (which was one of the
biggest automobile companies alongside Ford and General Motors) was on the verge of bankruptcy in 2009. The
company was facing a lot of turmoil following a failed merger with Daimler and its acquisition by Cerberus Capital
Management. The financial crisis made matters worse for the company and it had to reach out to the US and
Canada governments for a bailout loan. However, the bailout loans offered were subject to a turnaround plan for
which Chrysler had to look for a partner company which could help in its revival. This was the time when Fiat
showed an interest in acquiring Chrysler. In this regard, the two companies signed a non-binding letter of intent on
June 10, 2009. In this paper, we discuss the core reasons behind the merger, changes in management, cultural
issues, synergies and valuation of Fiat Chrysler Automobiles N.V.

The Companies
Fiat
Fiat (headquarters in Turin, Italy) was founded on July 11, 1899 by Giovanni Agnelli (ex-cavalry officer) and a few
other Turin businessmen. The company began manufacturing automobiles and engine parts for the automotive
industry in the early twentieth century. In 1903, the company was listed at Milan stock exchange for the first time.
Moreover, it begun producing vehicles for goods transportation, trams, buses and aircraft engines. In 1908, the
company started exporting in overseas markets such as France, Grain Britain, Austria, America and Australia.

However, both the First and the Second World War had a remarkable impact on Fiat and the range of its products.
With the advent of World War I, Fiat significantly expanded its production line significantly, and over the years,
the company became a conglomeration of various manufacturing enterprises. After the Second World War, Fiat
under Vittorio Valletta played a very significant role in the Italian economic boom. The car production grew six-
fold, and there was a significant increase in the number of employees due to the opening up of new plants across
the globe.

In 1969 Fiat acquired Lancia (a loss-making company at that time). During the same year, Fiat became a 50 per
cent shareholder in Ferrari and expanded its ownership to 90 per cent till 1988. This arrangement lasted till 2014,
when Fiat Chrysler Automobiles (FCA) announced that it would separate Ferrari S.p.A from FCA. This separation
was completed in January 2016.

At the end of 1970s, Fiat had become a holding company when it spun off its various businesses into autonomous
companies. In 1986, Fiat defeated Ford in a takeover bid of the ailing state-controlled auto maker Alpha Romeo as
it offered $5 billion for 100% ownership in Alpha Romeo. In 1989, Fiat acquired 49 per cent stake in luxury sports
car maker, Maserati from De Tomaso Industries Incorporation. It extended this share to 51 percent in 1993 and
took control of Maserati. In 1989, Fiat entered also into a joint venture with Chrysler Corporation, named Alpha
Romeo Distributors of North America to sell Alpha Romeo cars domestically. However, this alliance fell off in
1991, after Chrysler decided to dissolve it.
During the 1990s Fiat tried to conquer the emergent market in order to increase its global position and play an
important role in the more competitive globalized world. However, it faced a substantial decline in automobile
sales in the late 90s.

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Merger Analysis Fiat Chrysler

In 2001, Fiat group approved a restructuring plan aimed at addressing the difficult economic situation and the
problems of its automobile division. The plan provided for an increase in share capital, the divestment of some
activities and an industrial reorganisation programme, whereby Fiat will close or restructure 18 plants - two in Italy
and 16 abroad. Following this restructuring, Fiat emerged as one of the world’s largest industrial groups.
After the global financial crisis of 2008, Fiat witnessed a drop in its domestic demand. Following the financial
crisis, Fiat made some strategic partnership with other important players (like General Motors) and it went through
a huge cultural change in order to refocus its business on the automotive sector. Fiat also began the acquisition of
Chrysler Group and at the end of 2013 it owned 58.5 per cent of the US firm. Finally, in 2014, it purchased the
outstanding shares to assume full ownership of Chrysler.

In 2010, Fiat’s CEO, S. Marchionne, announced the necessity of restructuring the Fiat’s existing business thanks to
the spin-off of industrial assets in order to improve strategic flexibility to those businesses. On July 21, 2010, Fiat’s
board approved creation of a new independent company thereby creating two entities namely Fiat S.p.A and Fiat
Industrial S.p.A (which was listed in the Milan Stock Exchange for the first time in 2011). Fiat Industrial S.p.A
primarily produced trucks and tractors as well as marine equipment. Fiat S.p.A focussed solely on automobiles.

Chrysler
Chrysler is an American automotive company founded by Walter Chrysler, which was first incorporated as
Chrysler Corporation in 1925. It was the third largest auto company in Detroit, USA. Chrysler was one of the “Big
Three” automakers alongside General Motors and Ford in the United States.

With the purchase of Dodge Brothers, Inc. (founded in 1914), and the introduction of Plymouth in 1928, the
Chrysler Corporation had started to become a major presence in the American automotive industry. During World
War II, Chrysler played a key role in supporting the US Military along with General Motors and Ford. Chrysler
built more than 25,000 Sherman and Pershing tanks during the course of the war.

The period 1950-60 was a period of growth and innovation at Chrysler. The company pioneered the “muscle car,”
beginning with the 1955 C-300, featuring a 300-horsepower hemi V-8 engine, and following with the outstanding
1960 Chrysler 300 F.

In 1966–67 it acquired control of Simca in France, Rootes Motors Ltd. in Britain, and Barreiros Diesel in Spain—
which were renamed to Chrysler France, Chrysler United Kingdom, and Chrysler España, respectively. These were
sold to PSA Peugeot Citroën SA in exchange for minority shares in Peugeot Citroën in 1979. In 1970 the
Mitsubishi Motors Corporation of Japan began producing subcompact cars to be sold in the United States under the
Chrysler name; the following year Chrysler began buying shares in Mitsubishi, eventually acquiring 24 percent of
the Japanese automaker before selling all of its stock in the early 1990s.
In 1987, Chrysler bought the No. 4 automaker, American Motors (maker of Jeep vehicles) for $1.5 billion, but the
subsequent consolidation prompted another financial crisis that led to a restructuring of the company. During the
same year, Chrysler purchased an Italian company, Nuova Automobili F. Lamborghini (founded in 1963 by
Ferruccio Lamborghini), which made expensive, high-performance sports cars. In the 1990s, Chrysler came back
again, with vehicles like the powerful Dodge Viper sports car and its Jeep line-up. But Chrysler witnessed a sharp
fall in sales of large vehicles during the 90s as many Americans were more inclined towards purchasing small fuel-
efficient cars.

In 1998, Chrysler was acquired by Daimler-Benz of Germany and spent the next eight years as part of
DaimlerChrysler. However, its inconsistent financial results (loss of $1.5 billion) and pressure from German
shareholders prompted Daimler to seek a buyer in 2007. Daimler-Benz sold the company to Cerberus Capital
Management, an investment fund, which installed Robert L. Nardelli, the former chief executive of Home Depot, as
its chief executive. Mr. Nardelli vowed that Chrysler would make a comeback as an American-owned company, yet
the automaker, like others in Detroit, was battered by a deep sales slump in the 2008 financial crisis.

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Merger Analysis Fiat Chrysler

On January 16, 2009, the Treasury Department approved a $1.5 billion loan for Chrysler Financial. The interest
rate for the loans was one point above Libor. In return, Chrysler Financial promised to pay the government $75
million in notes and reduce executive bonuses by 40%.

Chrysler received $4 billion of the $7 billion bridge loan it originally requested. In return, its owner Cerberus
vowed to convert its debt to equity. Chrysler had also requested for $6 billion from the Energy Department in order
to retool for more energy-efficient automobiles. Chrysler wanted the Big Three to partner with the federal
government in a joint venture to develop alternative energy vehicles. However, this deal never happened.

On April 30, 2009, Chrysler filed for bankruptcy. Treasury Secretary Tim Geithner agreed to lend it $6 billion to
fund operations while in bankruptcy. It emerged as a new company, 58.5% of which was owned by Fiat S.p.A. This
Fiat-Chrysler merger created the world's sixth-largest automaker.

In 2013, Fiat CEO Sergio Marchionne announced plans to take Chrysler public on the New York Stock Exchange.
This allowed Fiat to purchase the rest of the company and merge the two into a more competitive global automaker.
In October 2014, it was listed under the ticker symbol "FCAU." The new company was called Fiat Chrysler Auto
Company N.V.

Culmination

Reasons and deal structure

In 2008, Fiat S.p.A was witnessing a sharp decline in sales owing to the global financial crisis. In a nutshell, the
situation of Fiat in 2009 could be regarded as a serious standoff: the growth momentum propelled by group
turnaround was stifled by the global crisis, which in turn led to contracted revenues and higher levels of caution
towards investments, even with respect to new models. Moreover, some sales targets were missed; this fact led
firstly to a revival of the Lancia and Alfa Romeo brands and to the acquisition of a stable presence in all emerging
markets, particularly China. On the other hand, Chrysler was on the verge of bankruptcy after a failed merger with
Daimler Benz and was seeking the US government’s help for a bailout. In order to survive and repay its maturing
debt obligations, Chrysler received some funding from the U.S. government in late 2008. However, the debts were
tied to the achievement of a satisfactory turnaround plan, for which it was necessary to find a partner in the industry
which would provide advanced technologies and resources. This was the main reason for the tentative agreement
between Fiat and Chrysler.

The final agreement was signed on June 10, 2009. Fiat and Chrysler had signed a non-binding letter of intent for
the creation of a global strategic alliance on January 20, 2009. According to this agreement, Fiat would provide
licenses permitting Chrysler to make use of platforms in its plants for the production of its fuel-efficient vehicles,
engines, transmissions and components. The two companies would also have had access to each other’s distribution
networks.

The letter of intent stated that Fiat would receive an initial stake of 35% in Chrysler, along with an option to
purchase an additional 20% after twelve months. For Fiat, the agreement would have meant gaining access both to
selling technologies thereby resulting in significant investments, and to markets with great potential, through the
launch of brands such as Alfa Romeo and Fiat 500. Therefore, Fiat would resume its path of internationalization in
the U.S., which had already been initiated and then abandoned by the company several times in the second half of
the twentieth century. For Chrysler, on the other hand, the agreement with Fiat was a major part of the recovery
plan that it submitted to the U.S. government and was consistent with the terms and conditions for the granting of
the received funds: corporate restructuring and the conversion of production processes towards environmentally-
friendly vehicles. In 2012, Fiat Group’s ownership interest reached 58.5%.

In 2014, Fiat group acquired 100% ownership in Chrysler Group. During the same year, the two companies merged
to create Fiat Chrysler Automobiles, which marked the beginning of a new phase for the fully-integrated global
automaker. As a result of this deal, Chrysler repaid all the loans received from the US and Canadian governments
in full with interests six months ahead of schedule. According to company officials, Fiat and Chrysler achieved full
integration at the industrial and cultural level and created an organization unified in practice.

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Merger Analysis Fiat Chrysler

Management
In terms of governance, Chrysler and Fiat shared the same CEO, and an adaptation towards the former company
was imposed. At the same time, top management from Chrysler was involved in the restructuring process from the
outset and the Group Executive Council of Fiat-Chrysler was opened up to managers from both organizations.
Moreover, some managers from Fiat were requested to join Chrysler’s teams to provide help in the process of
integration and share their competencies. Some managers from Chrysler were asked to move to Turin. Generally
speaking, the basic approach for defining the new Chrysler organization was to make the best possible use of any
local resources, minimizing the introduction of managers from Fiat (5 Italian team members out of 26 in the
Chrysler management team).

Benefits and Synergies

The acquisition of Chrysler provided Fiat Group with the opportunity to substantially redefine its strategy, markets
and products. Firstly, the new Fiat-Chrysler entity acquired a wider and more diversified reference markets,
through the addition of the North American market to the European market and the South American ones.
The new Fiat-Chrysler entity commenced a strong process of integration and standardization that optimized design
and distribution costs by achieving broader economies of scale. This standardization strategy focused primarily on
components that are substantially transversal to all architectures and that constitute 70%-75% of total vehicle costs
(for instance powertrain technology, lighting, instruments, steering systems).

Attention was therefore not paid to the remaining components (for instance, interior and exterior trims, seats,
instrument panels, exterior and interior lightning) that are highly specific and characterize model and brand
identity. Fiat-Chrysler focused on the minimization of basic vehicle architectures, targeting three modular
architectures shared by both Fiat Group and Chrysler (mini, small and compact), two specific architectures for
LCVs, and low-cost vehicles as well as four Chrysler architectures inherited from models already in production.

Another strength of the Fiat-Chrysler deal is the potential for sharing low-consumption engine technologies in order
to optimize the powertrain scenario in the North American market, which is dominated by gasoline engines with
medium-high engine capacity. For instance, in 2010, Chrysler had 91% gasoline engines, of which 54% were 6-
cylinder and only 19% 4-cylinder (the closest to European standards). In order to increase power, high
displacement engines were typically used, at the expense of consumption and pollution. Regulations originally
introduced in California and progressively adopted by an increasing number of other States, by contrast, defined
severe threshold limits for both fuel consumption and CO2 emissions. After, the strategy was to leverage the
experience of Fiat in the powertrain field. Generally speaking, what would be changed significantly is not the
prevalence of diesel engines (actually linked to final customer’s choices, culture), but proportion of medium-high
displacement gasoline engines, along with the doubling of 4-cylinder engines, while halving the total number of
engine families.

The focus on the World Class Manufacturing (WCM) philosophy, which was extended progressively to all Fiat-
Chrysler and Fiat Industrial plants, was expected to yield substantial savings, first of all in terms of product quality
and reliability. It was anticipated that Fiat and Fiat Industrial, quite experienced in WCM, would generate 1.9
billion Euros of savings in the period 2010-2014. Chrysler, which implemented the WCM approach after getting
acquired by Fiat, had a target of 1 billion Euros of cumulative savings for the period 2010-14.

Merging the purchasing needs of three actors; Fiat SpA, Fiat Industrial and Chrysler made it possible to reach a
mass large enough to generate consistent savings on purchases. While in 2009, the total volume of purchasing
generated by the combination of Fiat and Fiat Industrial exceeded 20 billion Euros, in 2011, it exceeded 50 billion.
In terms of savings, for the period 2010-14, it is expected that Fiat-Chrysler and Fiat Industrial will reach total
savings level of over 5 billion Euros, with an average of 2.1-2.2% every year.

In relation to the advantages of M&A already mentioned, as highlighted by Grinblatt and Titman (Grinblatt,
Titman, 1998), namely operating synergies, market-power hypothesis motivations, disciplinary takeovers and tax
motivations, most of the aforementioned gains can be recognized in the Fiat-Chrysler deal. Fiat acquired a
competitor (strictly speaking) andthen introduced a far more effective approach to management in Chrysler and
achieved several operating synergies. Through the acquisition of Chrysler, Fiat was able to turn from a niche player
(i.e. Italy/Brazil and A/B small car segment) into a ‘full liner’ automotive car company. Moreover, the industrial

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Merger Analysis Fiat Chrysler

plan put forward by Fiat in April 2010 in Turin was a mirror image to that of Chrysler’s plan, presented in
November 2009 in Detroit. By utilizing each company’s strengths and core competences, both plans were directed
at creating the most unified strategic partnership, aiming for an ‘operational’ merger before a more comprehensive
financial tie-up could be considered.
One of the main issues faced by companies operating in a mature market (like automobiles) is that of becoming
slow in taking decisions and thus failing to react effectively to market change. Another issue was the prevailing
functionality of products in the automotive market that exceeded that which could have been utilized by customers.
Consequently, making even better products no longer yields superior profits. Instead, innovations allowing
company’s ability to enhance to bring products rapidly to market and to customize offerings in a responsive manner
became the mechanism to achieve advantage in the market. But, Fiat Group’s main and historical advantages is its
extremely compressed timing for new model development. Following a continuous series of development process
refinements, the Fiat Group is able to achieve a market launch from technical release in 18 months. This timeframe,
which enabled groups to be relatively faster in context to responding to market demands than its competitors, is
achieved by means of a series of strategies, including the extensive use of virtual simulation instruments,
structuring of the engineering process, early involvement of suppliers, and standardization of components and
architectures. This approach was intended to be shared with Chrysler, where development timing offers wide
margins for improvements.
The Fiat-Chrysler case appears to be an integration process of one partner, with another that needs to be
restructured in order to gain profitability. Chrysler, on the one hand was in a very difficult situation in 2009 and
restructuring was necessary for it to recover positive industrial and financial results. On the other hand, integration
between Chrysler and Fiat was, and still is, necessary for optimizing and achieving the advantages from the
acquisition. A mixture of the above mentioned “top down” and “bottom-up” approaches was applied therefore. Fiat
had shared its top management with the Chrysler Group and had imposed a turnaround on the latter. At the same
time, management from Chrysler was involved from the outset in the restructuring process, and the Group
Executive Council of Fiat-Chrysler was opened up to managers from both organizations.

The Obama administration stated Chrysler had significant problems: lower number of fuel-efficient vehicles and
small & mid-sized cars; poor initial quality; not a good branding strategy, sales highly concentrated in North
America. Chrysler to survive without a product-sharing alliance seemed highly unlikely. This new ownership
structure with Fiat involved had been a mixture of barter of technology and performance goals with equity stakes,
along with onerous conditions to buy equities obtained from the other equity holders [US Treasury, Canadian
Government and United Auto Workers (UAW)]. As requested, Fiat had planned to fit Chrysler vehicles with fuel-
efficient engines, expand Chrysler sales overseas, and pay-off loans from the US and Canadian Governments. In
return, Fiat was allowed to raise its stake in Chrysler to a controlling 58.5% in 2011, up from 30% (41.5% stake
was still with the UAW).

Norms
Fiat and Chrysler decided to harmonize their technical norms to exploit their complementarities (as also happened
in the Daimler-Chrysler case, adopting one set of norms, as for example Daimler’s norms, instead of facing a
complex harmonization processes). The norms that undergo the harmonization process were related to the project
development and components design while norms about industrialization, such as plant’s layout did not get
included. The harmonization process was expected to take more than 200 thousands hours of work; about three
years.
Fiat and Chrysler started comparing each norms step by step and soon acknowledged it to be very time consuming.
So, they tried to speed the process by reviewing clusters of norms. For example, Fiat and Chrysler had different
norms about materials. Instead of comparing these norms one by one which could have taken 8 months (Di Muro),
it was decided to organize the norms into clusters or families, e.g. all norms about materials, and then decide if to
select the cluster of Fiat or to select Chrysler’s cluster. In the latter case, the main challenge faced was to define the
selection criteria.
Fiat and Chrysler managers stressed the criteria followed in selecting clusters.

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Merger Analysis Fiat Chrysler

 Clusters abiding by both EMEA and NAFTA legal requirements were to be preferred.
 Higher competences with regard to the analyzed clusters, these have to be acknowledged and exploited in
the new set of norms.
 For materials, Chrysler’s standards were selected because these were applicable to both NAFTA and
EMEA markets. Fiat norms did not respect all US requirements about materials.

Fiat Chrysler harmonization of technical norms also aimed at emphasizing complementary competences. For
example, Fiat has special competences in the sport segment, which includes Italian brands such as Maserati and
Alfa Romeo, and thus defines the suspensions, handling, and comfort of the sport segment. Chrysler, which
produces the Jeep, manages the handling comfort of the off road and tracks. According to Mauro Pierallini, when
firms are highly competent, one leader is selected and the counterpart signs the application: there is a very high
level of cooperation and both firms have to agree on the norms selected. Pierallini noticed, by the end of 2012, that
despite the guidelines about how to select clusters, the harmonization was a work in progress for unexpected and
complex issues during the integration process.

 First, over design is a central issue. If technical norms have to contemporarily accomplish the needs of
diverse clients and legal requirements of the diverse states, firms may be willing to set norms that
contemporarily accomplish all needs and that are complex and translated into expensive product
specifications and tests
 Second, even if selected clusters can be applied to both geographical areas, technical norms may depend
on some specific and unique firm’s features and these norms should not become standard. “For example
one firm may have quality issues that can be solved with a sensor that has a cost. The other firm, which has
never experienced such problems, may say no. A compromise is needed” (Pierallini).
 Third, Fiat being traditionally more focused on the manufacturing area then Chrysler, Fiat’s plants had
more sophisticated tools developed to specifically measure and control components and aimed at helping
the R&D area in solving technical issues in components design. Chrysler technical norms are less reliable
then Fiat norms as regard manufacturing issues.
 Finally, identifying complementary competences when firms have distant clients may be meaningless:
each firm is more competent in understanding its client needs and in translating them into product
specifications.
Technical norms harmonization was central in Fiat-Chrysler integration but it was also complex and long. This
might be the reason why Fiat and Chrysler decided to start the development of their first shared product platform
before the completion of technical norms integration.

Partner Fit
Before creating alliance with anyone or making a merger it is significant to see the fit of the partner with the firm
which will create the maximum value after integration while achieving shared goals and objectives. A partner fit is
a well-defined strategy for the development of the integrated firm and the market. For fiat Chrysler was the best fit
as a partner for merger because of two reasons-
1. Fiat wanted to enter into a new market because of decline in the domestic sale of cars as a result of
maturity of automobile market in EU and Chrysler would become a strategic partner for Fiat in USA.
2. Fiat could use the distribution network of Chrysler for its own Fiat 500 and Alfa Romeo.

From the perspective of Chrysler Fiat was not only a best fit but also a life savior because it provided funds to
Chrysler which it needed as stated in terms of its loan from US government and the low combustion engine
technology was all what Chrysler wanted at that time to survive in the US market.
A partner fit is categorized as having:
 An efficient and effective alignment.

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Merger Analysis Fiat Chrysler

 A focus on achieving and maintaining a good fit.

 Finding the right partner.
In this paper will be talking about the four types of partner fit namely, cultural, strategic, organizational, and
capabilities.

Cultural fit- it is determined by the compatibility among the partners in terms of business objective, competitive
approach, ways to manage and communication. When two of more companies merge the culture to which both
companies belong play a pivotal role In the success of the merger. People from different culture show different
attitude, moral, perspective about the world and the circumstances. Their culture affects their way of thinking and
their decision-making attitude, for example some people from a conservative culture are risk averse while some can
be risk loving belonging to a different culture and this could lead to a conflict of interest if both of these people
were to take a financial decision in a firm. Merging of two culture of the two firms is more important for its success
than anything else.

For analyzing the culture aspect of the merger, we will use the famous Hofstede model of cultural differences.
Hofstede model defines the culture of any country in the following 6 dimensions:
 Power distance index
 Individualism vs. collectivism
 Masculinity vs. femininity
 Uncertainty avoidance index
 Indulgence vs. restraint

The below figure shows the score of both the countries on all these dimensions respectively-

PDI is different for northern Italy and southern Italy. For northern Italy PDI is 50 which represents the
individualism among people. People prefer equality and decentralization of power and generally prefer teamwork
and open and free management rather than a dogmatic management with more control and supervision.
For USA the score is even low (40) which shows the attitude of Americans towards power inequalities. The US has
a long history of inequality. Money is powerin the US and the decision of wealth is very lopsided. The history tells
how Americans have pushed back power inequalities as much as possible since the country was founded upon
tolerance.

The high score of 76 in Individualism for Italians show their pride in pursing ‘I’ rather than “me”. Italians find
themselves alone even when surrounded by crowd and thus friends and family become an important part for one.

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Merger Analysis Fiat Chrysler

For Italians with their own personal objectives and ideas in life is very motivating and the route to happiness is
through personal fulfilment.
An even high score of 91 shows the competitive side of American culture. The self- fulfilment attitude is what they
carry and believe that all the success one could achieve is through self-determination and perseverance. It is in a
way a highly competitive dog eat dog world today. Therefore, many Americans focus on self-advancement and
gain. Family is also very important to Americans. Most workplace relationships are not extended beyond the
workplace and individual goals and drive centre around providing for family members and also self-gratification. In
the workplace, Americans tend to excel at one specific task and rely on an effective corporate hierarchy structure of
communication to accomplish workplace task.

Everyone knows about the Italian lifestyle, highly influenced for Russians, Italians teach their children to be
competitive and being competitive is the only way to achieve success. They pay a very high value on material
success which is seen by the luxurious cars, yatch and houses they own. This is the reason behind their score of 70
in masculinity.

For American a score of 62 can be understood with the help of a high individuality. From the childhood Americans
are inculcated with “can-do” mentality. They are taught ‘strive to be the best’ and winner takes it all sentiments.
For them success is not that important as showing the success is. Even there are certain systems in America where
employees can show how good they did at work.

For Italians the score for uncertainty avoidance is quite high at 75 that shows the risk averse attitude of the Italians
as a nation. They are not comfortable in ambiguous situations. In Italy the combination of high Uncertainty
Avoidance and high Masculinity makes life very difficult and stressful. To release some of the tension that is built
up during the day Italians need to have good and relaxing moments in their everyday life, enjoying a long meal or
frequent coffee break. On the other hand Americans are open minded and believe in uniqueness and have a low
uncertainty avoidance. They believe that everyone can have a idiosyncratic ideology and this could benefit all.
They try new technology and norms for future prospects. American aren’t as emotionally expressive as Italians.

Italy’s high score of 61 on this dimension reflects that Italian culture is pragmatic. In societies with a pragmatic
orientation, people believe that truth very much depends on the situation, the context and the time. They show
ability to adapt traditions easily to changing conditions, a high propensity to save and invest, thriftiness, and
perseverance in achieving results. But Americans have a very low score of 26 which show their normative attitude
towards new information.
Indulgence at 30 translates to an Italian culture of restraint. Italians believe that social norms restrain their actions.
Italian’s are hesitant to indulge themselves in that they feel it is somewhat wrong.

An indulgence score of 68 shows that American are less likely to hold back and control their impulses but to feed
the beast so to say. A common believe among the millennials in society is to work hard and play hard. Americans
on the contrary like to enjoy their life and have fun as a way to relieve any stress and tension from working all day
and or week.

A high correlation of Power Distance Index, Individualism, and Masculinity between both the countries is reflected
in the culture developed in FCA after the merger. The power structure of organisation was decentralized with the
integration of employees from both the organisation. Individualism and masculinity which was high in the
employees of both the organisation before merger helped into greater merger of culture of both the organisation and
increase the work environment. The presence of masculine nature in the employees of the organisation might be
one of the reason for the success of the merger.

Business objective- It includes growth and profitability approaches, risks, long/short term
approaches, shareholders vs stakeholders’ approaches-

 Both Fiat and Chrysler shared the same objective of long-term growth and profitability. Fiat
wanted to enter into new market for its growth and Chrysler wanted to remain in the market and
utilize the future opportunities. For Chrysler, Fiat’s low fuel combustion engine’s technology was
a gold to penetrate the market and utilize it for the prospective demand for high milage vehicles.

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Merger Analysis Fiat Chrysler

 Both the companies shared long term shareholders’ approach. In the speech made by Fiat CEO
Marchionne he talked about the long-term path that both the company has stepped on and how
they could be the world leaders if they work hard and honest and how they could face their
shareholders after they achieve what they promise. This shows the company’s belief in long term
investors.
 Both the companies faced risk. Chrysler faced the risk of bankruptcy before the merger and the
Fiat faced the risk of maturity and no growth.

Competitive approach- It includes customer orientation, pricing objective and power, focus on
importance of quality and importance of technology.

 Companies utilized the new power train engine technology which was ecofriendly and cost
effective. This was the need of the hour in North America which was dominated by gasoline
engine, . For instance, in 2010, Chrysler had 91% gasoline engines, of which 54% were 6-cylinder
and only 19% 4-cylinder (the closest to European standards). In order to increase power, high
displacement engines were typically used, at the expense of consumption and pollution.
Regulations originally introduced in California and progressively adopted by an increasing
number of other States, by contrast, defined severe threshold limits for both fuel consumption and
CO2 emissions. The next strategy was to leverage the experience of Fiat in the powertrain field.
Generally, what would be changed significantly is not the prevalence of diesel engines (actually
linked to final customers’ choices and culture), but the proportion of medium-high displacement
gasoline engines, together with the doubling of 4-cylinder engines, while halving the total number
of engine families (Bernardo Bertoldi, et.al)
 Fiat – Chrysler used the world class manufacturing (WCM) technology for producing its vehicles.
They standardized the models around the globe so that the production time could be reduced and
achieved the minimum time of launching a new product in market which was 18 months. Fiat
realized that customers wanted new technology and features frequently and so the companies who
could deliver that would be the best survivor.

Ways to manage- leadership style, and trust/control.

 Both fiat and Chrysler showed the best integration of culture. Both shared the same CEO and the
adaption towards the later was imposed (Bernardo Bertoldi, et.all). The top management of
Chrysler was incorporated in transforming and restructuring and channelising the process. The
Group executive council was opened to managers of both the companies.

Communication- openness/secrecy, formal/informal, and the freedom of personal relationships

within the company-
 Fiat was always a open company and showed freedom. Chrysler on the other hand was not open
on the losses it was making continuously but after the merger both companies press released the
material about and alliance and showed confidence in the merger.
Strategic fit- It refers to matching of the mission and objectives of an organization to its internal and
external environment. It is characterized by harmony, shared and coherent goals and strategic posture.

Main objectives of Fiat – Chrysler:

 Fiat because of its maturity in European market and almost no growth was looking for a partner
who could get its entry into North American market which would become a new avenue to launch
its products and also a measure to continue its growth.
 Chrysler was on the brink of Bankruptcy but was bailed out by US government on the terms to
find a strategic partner for its revival. Also Chrysler was in search of a partner who could provide
them with technology to manufacture smaller- fuel efficient cars on global scale.
Both Fiat and Chrysler were best fit for each other on the strategic scale. Chrysler would help Fiat to enter
into North American market with its resources and distribution chain and Fiat would help Chrysler with
the new powertrain fuel efficient engine technology.

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 Merger Analysis Fiat Chrysler

Strong substantial cost saving-

 Fiat was able to use Chryslers extensive dealer network, supplier base and production capacity in
the US which saved them upfront cost and Chrysler was able to save up to 3-5 years of
development cost.
 With the merger of Fiat SPA, Fiat Industrial and Chrysler the purchasing need of the companies
enhanced and that gave the company cost saving on purchases because of economies of scale.
While in 2009, the total volume of purchasing generated by the combination of Fiat and Fiat
Industrial exceeded 20 billion Euros, in 2011, it exceeded 50 billion. In terms of savings from
purchasing volume improvement, in the period 2010-2014, it is expected that Fiat-Chrysler and
Fiat Industrial will reach total savings of over 5 billion Euros, with an average of 2.1%-2.2%
every year (Bernardo Bertoldi, et.all).

Product Differentiation/ Widen their product portfolio-

 After entering into North America fiat had the chance of including new products into their product
portfolio by including larger cars for the US market based of consumer preferences.
 Chrysler also wanted product differentiation to be competitive in the US market because of
changing consumer preferences which it got because of new engine technology.

Organizational Structure

Deputy CEO (Jim CEO (Marchionne) Chairman (C.R.

Press) Kidder)

9 Management Members- 3 Fiat/4 US treasury/1 VEBA/1 Canadian government

4 Divisions/ one for each brand

Jeep president/ CEO Mopar President/ Dodge president/ Chrysler

CEO CEO president/ CEO

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Merger Analysis Fiat Chrysler

8 I’s of a Successful Alliance

INDIVIDUAL
IMPORTANCE
EXCELLENCE

INTERDEPEN
INVESTMENT
DNCE

INTEGRATIO
INFORMATION
N

INSTITUTION
INTEGRITY
ALISATION

Rosabeth Moss Kanter suggested 8 criteria’s to a successful alliance in “Collaborative Advantage: The Art of
Alliances”, Harvard Business Review, July-August 1994.
The Fiat-Chrysler alliance satisfied 6 out of the 8 criteria:

1. Interdependence: Both companies depended on each other for sharing technology and resources. Fiat had
failed in its first attempt to enter the American automotive market because of lacking manufacturing
resources and a large distribution channel. Chrysler is dependent on Fiat’s new power train technology to
break away from manufacturing large gas guzzling vehicles. Ken Bensinger wrote that “Neither has what

13
Merger Analysis Fiat Chrysler

the other one does. The whole is greater than the sum of its part.” This clearly demonstrates the
interdependence between the two companies.

2. Importance: The alliance is important to Fiat because it allows Fiat to utilize Chrysler's dealer network.
They can now enter the US without any upfront cost. It was very important for Chrysler because it could
use Fiat’s technology to help meet the market demand for smaller, more fuel-efficient cars. The alliance
also saved Chrysler billions on R&D. Long term, the alliance will facilitate Chrysler to pay back the US
government a faster rate.

3. Investment: Instead of Chrysler just taking Fiat’s technology, the company invested 179 million to further
develop the power-train engine technology. Fiat has shown a high willingness to invest even further into
Chrysler by increasing their share from 20% to 35% if Chrysler hits certain benchmark goals.

4. Integrity: There seems to be mutual trust between the two automotive companies with Fiat’s CEO
Marchionne saying, “By bringing together Fiat…with Chrysler’s rich heritage, strong North American
presence, and talented and dedicated work force will create a powerful new automotive company.”

5. Integration: Chrysler retooling its Michigan plant to make the Fiat 500 is a clear sign of integration.
Chrysler is also integrating Fiat’s technology into their new 2011 vehicle line up.

6. Information: Both companies share operational information as well as any new information from research
and development endeavours.

The alliance does not have institutionalization and individual excellence. Institutionalization requires clear
responsibilities and clear decision processes. Given lot of government interference and conditional structuring of
the deal, there seems to be a lack of institutionalisation. While Chrysler owes huge debts to the government and it’s
vehicle are not fuel efficient, Fiat is also experiencing a slump in sales due to the great recession, hence there seems
to be a lack of individual excellence.

Valuation

Valuation is a general process of determining the economic value of a company. There are numerous ways a
company can be valued. You'll learn about several of these methods below. This is by no means an exhaustive list
of the business valuation methods in use today. Other methods include replacement value, breakup value, asset-
based valuation and still many more. This study has used DCF approach towards valuation and have used actual
figures from 2009-19 to arrive at the Valuation of Ford Chrysler Automobiles (FCA) at the end of 2009.

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Merger Analysis Fiat Chrysler

Market Discounted Cash Flow

Capitalization Earnings Multiplier (DCF) Method
Market capitalization is The earnings multiplier This method is based on
the simplest method of adjusts future profits projections of future
business valuation. It is against cash flow that cash flows, which are
calculated by could be invested at the adjusted to get the
multiplying the current interest rate over current market value of
company’s share price the same period of time. the company. The main
by its total number of In other words, it adjusts difference between the
shares outstanding. the current P/E ratio to discounted cash flow
account for current method and the profit
interest rates. multiplier method is that
it takes inflation into
consideration to
calculate the present
value.

V0 = Present Value of Future Cash Flows

𝐶𝐹1 𝐶𝐹2 𝐶𝐹𝑛
V0 = 𝑊𝐴𝐶𝐶1+𝑊𝐴𝐶𝐶2+ …… +𝑊𝐴𝐶𝐶𝑛

Figures of Cash Flow from Operations (CFO) in the numerator and WACC was calculated as
WACC = Kex We + Kd x Wd

Where,
Ke is Cost of Equity
Kdis Cost of Debt
We is Weight of Equity in Total Capital
Wdis Weight of Debt in Total Capital

Ke was calculated using CAPM method

Ke= Rf + (Rm – Rf) 

 S&P 500 returns were used as Rm and10 year bond T-Bill rate was used as Rf
  is the slope of regression of Rs over Rm. It is a measure of systematic risk
S&P 500 FCA € in Millions
Date closing price Rm Rm-Rf EPS Market Price Rs Ke We Kd(Before tax) Kd (After Tax) Wd WACC CFO DCF
2008 885.28
2009 1102.47 24.53% 20.80% 4601
2010 1257.64 14.07% 10.34% 0.41 13.55 3.03% 4.413% 0.375 4.35% 2.61% 0.625 3.29% 6110 5915.64
2011 1257.6 0.00% -3.73% 0.962 2.98 32.28% 3.484% 0.264 4.73% 2.84% 0.736 3.01% 5195 4895.92
2012 1426.19 13.41% 9.68% 0.036 3.37 1.07% 4.369% 0.228 6.75% 4.05% 0.772 4.12% 6492 6234.99
2013 1848.36 29.60% 25.87% 0.744 5.37 13.85% 5.438% 0.294 6.56% 3.94% 0.706 4.38% 7618 6992.40
2014 2058.9 11.39% 7.66% 0.465 7.77 5.98% 4.236% 0.289 6.07% 3.64% 0.711 3.81% 8169 7868.89
2015 2043.94 -0.73% -4.46% 0.22 9.45 2.33% 3.436% 0.443 13.38% 8.03% 0.557 5.99% 9751 8679.83
2016 2238.83 9.54% 5.81% 1.18 9.06 13.02% 4.113% 0.546 9.74% 5.84% 0.454 4.90% 10594 10099.22
2017 2673.61 19.42% 15.69% 2.24 17.84 12.56% 4.766% 0.662 11.65% 6.99% 0.338 5.52% 10385 9327.08
2018 2506.85 -6.24% -9.97% 2.33 14.42 16.16% 3.072% 0.742 11.04% 6.63% 0.258 3.99% 9948 9566.37
2019 3230.78 28.88% 25.15% 4.23 14.87 28.45% 5.390% 0.781 11.68% 7.01% 0.219 5.74% 10462 9356.35
Total PV of DCF 78936.71
PV of perpetuity 1506.54
Total Valuation 80443.25
Source: Calculated by authors

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Merger Analysis Fiat Chrysler

Using this method the study arrived at valuation close to 80.5 Billion Euros. This is larger than Book Value of the
Total Assets at the time which stood at roughly 68 Billion Euros. Obviously the analysis might seem exaggerated,
looking at these figures but it is a post analysis based on cash flows generated post-merger where the synergies
have played out well. The merger fared out well and it can inferred from the following figures.

Shipments in thousands of units

6000

5000

4000

3000
Total

2000

1000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

As a result of this merger the total number of units sold have increased from a level of 2000s to 4000s in just 3
years. It has remained in 4000s ever since with insignificant movements here and there. In terms of revenues FCA
outperformed analyst’s projections but failed to meet the targets it has set for itself. All and all, there was an
increase in revenues as well as profit which can be observed from the figure below.

FCA Revenue Estimates Vs Actuals

120000
100000
80000
€

60000
40000
20000
0
2011 2012 2013 2014
FCA estimates 76000 85000 97000 104000
GS estimates 72688 78922 83805 86699
Actuals 59559 83765 86624 96090

All and all, there was an increase in revenues as well as profits. Fiat/Chrysler closed 2011 with a profit of € 851
million. Chrysler already contributed € 556 million to Fiat-Chrysler’s profit. Chrysler’s sales rose by 24 percent,
while (excluding luxury brands Ferrari and Maserati), “Chrysler’s market share in the U.S., its biggest and most
lucrative market, increased nearly two points to 11.4% in the third quarter...This house continues to be fully
focused on financial performance and making outstanding cars and trucks by fully leveraging its alliance with Fiat”
said Fiat-Chrysler CEO Sergio Marchionne Oct. 2011

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Merger Analysis Fiat Chrysler

Having exercised a wide range of options, Fiat is ended 2011 with a 59% equity stake in Chrysler, leaving the
UAW pension and healthcare fund VEBA as the only minority shareholder, with an equity interest of 41%.

Post-Merger Scenario
2015
The Jeep industrial complex was established in Goiana, brazil, the new state of art. With the production capacity of
more than 2,50,000 vehicles per year and the capacity to produce three distinct models, this plant became the
group’s biggest facility.
The brand’s first locally produced model, Jeep Cherokee’s production began in GAC-FCA joint venture plant in
Changsha, China.
The Luxury car-brand Ferrari was listed in the New York Stock Exchange in advance of its intended spin-off from
FCA.
The new Giulia Sedan was revealed by Alfa Romeo, the brand’s one of the first new generation of models.
World Class Manufacturing Gold was awarded to the verrone transmission plant in Italy.
2016
FCA completed the spin-off of the Ferrari at the dawn of January
On the product front, 2016 was one of the most active year for the group, it introduced the group into six new
product segments:
New Giulia was launched by the Alfa Romeo, where Maserati launched its first ever SUV, and Fiat introduced the
Fullback, 124 Spider, Tipo and Toro,
Chrysler launched the new Pacifica and the Pacifica Hybrid which was the industry’s first-ever electrified minivan.
It is quite interesting that Chrysler was the brand which introduced the minivan concept back in 1980s.
Collaboration was announced by FCA with Waymo, which was formerly known as the Google Self-Driving Car
Project. FCA further announced the completion of production of 100 Chrysler Pacifica Hybrid built for fully self-
driving operations.

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Merger Analysis Fiat Chrysler

2017
Stelvio was launched by Alfa Romeo, which was the first ever SUV from the Brand.
The production of the vehicle called Compass began in India by Jeep, it made possible for jeep to produce in total
of six countries then.
After more than 30 years away from the Formula 1, Alfa Romeo announced its return to the sport for the
championship season 2018.
The production of the new Cronos Sedan began in Argentina by Fiat, which aimed to distribute the vehicle in the
market across Latin America.
A memorandum of understanding was signed by the FCA with the BMW group, Mobileye and Intel to establish the
autonomous driving Platform.
80th anniversary year was celebrated by Mopar.

2018
After the Untimely passing of Mr. Sergio Marchionne, there was a sudden and an unexpected change in the
leadership where Mike Manley was appointed as the CEO of the FCA on July 21
Two of the most prestigious awards were bagged by the new 1500, which was produced by Ram, namely North
American Truck of the Year (NACTOY) and Motor Trend Truck of the Year.
The most capable Jeep truck ever, the Gladiator was launched by Jeep.
To support the renewal of the range of products and development of the new power-train solutions with immense
concentration on the hybrid and electric technology, FCA announced €5 billion investments in Italy.
To sell the MAgneti Marelli, the automotive components business to the Calsonic Kansei, FCA entered into an
agreement.
Jeep and Ram both reach record global sales.
2019
FCA and Groupe PSA agreed to get into a 50/50 merger in December, that would create a leading mobility
company.
FCA announced investments of about $4.5 billion to expand production capacity in Michigan so as to grow core
brands and specifically electrify Jeep Vehicles.
A global connected vehicle ecosystem was established by the FCA that would use the Google’s and Harman’s
Andriod Technology and would be featured on all new Group vehicles worldwide by 2022.
Jeep Launched its first ever Energy vehicle for the Chinese market, the Commander PHEV
Fiat brand celebrated its 120th anniversary.
Abarth celebrated its 70th anniversary year.
FCA sold the Magneti Marelli to Calsonic Kansei.
FCA entered into an agreement to sell Teksid’s components of Cast-iron automotive to Tupy.
2020
FCA’s Poland plant is emerging as its investing heavy amounts in its establishment. It recently invested 2.4 billion
euro in the Poland plant. Where full-fledged electric cars would be produced.
The merger of the Fiat and Chrysler is now conditionally approved by the European Union.

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Merger Analysis Fiat Chrysler

Due to the pandemic there was an outburst of anger from the workers at the plant in Detroit as the company was
planning to force a ‘inhumane’ work-time schedule for its workers which involved working for 12 hours a day for 7
days a week, followed by a break of 1 week.

Observations
From the above case, it appears that one of the main issues that needs to be addressed in the quest for a successful
cross-border merger is a higher degree of integration of the two merging entities, from financial and industrial
points of view. Markets and products therefore need to be complementary as well as compatible, so that the
positive effects of economies of scale through the sharing of purchasing and technologies can be fully leveraged.
Finally, in order to achieve a satisfactory level of integration, both entities must be willing and able to work
together and focus on the same overall objective. In the Fiat-Chrysler case, both Groups were highly motivated
achieve a common goal. On the one hand, for Fiat, the deal represented the ideal occasion for a revolution of its
strategy, offering excellent growth opportunities for the Group. On the other hand, Chrysler had also received some
funding from the U.S. government, on the condition that it has to achieve a satisfactory turnaround, for which it
needed the right partner. The alternative for Chrysler would have been bankruptcy. The alliance turned out to be a
great new start for Chrysler. Even though Marchionne has not hit the sales goal he set, he seems capable and
determined to make this alliance a success.

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Merger Analysis Fiat Chrysler

References

Bertoldi, B., Giachino, C., Bernard, S., &Prudenza, V. (2017). The Fiat-Chrysler Deal: Looking For Good Returns
From M&A.(DB Bloch, Ed.). Journal of Business Strategy.
(MorningSTar, n.d.)
https://www.fcagroup.com/en-US/Pages/home.aspx

https://www.google.com/url?sa=t&source=web&rct=j&url=https://core.ac.uk/download/pdf/301857844.pdf&ved=
2ahUKEwi8rvb5sPPtAhUWxzgGHSUVDOYQFjASegQIHRAB&usg=AOvVaw0XB5Iaw3hfilrTqeRGt_ed
https://successstory.com/companies/fiat-chrysler
https://www.britannica.com/topic/Fiat-SpA

https://www.britannica.com/topic/Chrysler
https://www.just-auto.com/analysis/fiat-chrysler-merger-brings-birth-of-a-new-auto-giant_id113406.aspx

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