NEW YORK/DETROIT (Bloomberg) -- Fiat Chrysler Automobiles CEO Sergio Marchionne is looking at other automakers as merger candidates as the chances of striking a friendly deal with General Motors dwindle, people familiar with the matter told Bloomberg.
Marchionne has been working with an advisory firm to gauge investor interest in pushing for a combination of FCA and GM and is also looking at other candidates due to the Detroit automaker’s lack of interest.
He and his advisers are eyeing other large automakers as “Plan B's” and considering France’s PSA/Peugeot-Citroen as a fallback option, said two of the people, who asked not to be identified because the matter is private.
While Marchionne has not given up on the idea of luring GM to the bargaining table through shareholder pressure, his camp knows that they need to explore more options because GM CEO Mary Barra and her board have stonewalled him, the people said.
Marchionne said in an interview that he prefers a friendly deal if he can get one, particularly with an automaker that has a similar product range, providing more opportunities for cost-saving.
“There is no doubt that the preferred route is to work through the corporate-governance system of companies and not to circumvent decision-making processes within companies,” Marchionne, 62, said in a June 6 interview in Venice. “We continue to see an increasing use of alternative methods of accomplishing goals. Whether it’s doable or not in this environment is an incredibly hypothetical question.”
Barra said Tuesday before the company’s annual meeting that she received an email from Marchionne recently and had her board review it. She said that the board isn’t interested in discussing a merger with FCA.
GM’s board sees a merger with FCA as a distraction from the company’s own efforts to build vehicles more efficiently and fix problems such as its money-losing Opel/Vauxhall unit in Europe. Adding FCA’s troubled European operations and market-lagging U.S. car brands would set back the company’s progress by several years, said one of the people.
Marchionne said in an April 29 presentation to investors that the entire auto industry needs to consolidate to spread the massive costs of developing new models, efficient engines and clean-emissions technologies over a larger base of sales. If it doesn’t, the industry will continue to post returns on capital that trail other industries.
His first choice is GM, said the people. The world’s third-largest automaker behind Toyota Motor Corp. and Volkswagen Group has a lot of scale and there’s a lot of overlap that could be consolidated. GM and Ford have publicly said they aren’t interested.
Marchionne’s advisers are sizing up others. Volkswagen remains a possibility, but only after options with GM have been exhausted, said the people familiar with the plan. The problem FCA has with Volkswagen is that the German carmaker is used to getting full control of the companies it buys, whereas the Agnelli family that controls FCA doesn’t plan to sell its stake, said one of the people.
They want to keep a diluted position in a new, merged company, the person said. In any case, VW reiterated last month that it isn’t pursuing any deals.
FCA could also approach automakers smaller than GM, such as Mazda Motor Corp., Honda Motor Co., Suzuki Motor Corp. and Hyundai Motor Co. If all else fails, Marchionne would approach PSA, whose CEO Carlos Tavares is in the midst of a fix-it plan.
Tavares, who joined the French automaker last year, would want at least six more months to continue with his plan before entertaining any talk of a merger or alliance, two of the people said. He hasn’t said that he would be interested in a tie-up with FCA, they said. PSA has been showing progress, narrowing its adjusted loss in 2014 to $259.4 million from $3.08 billion in 2013.
Jean-Baptiste Thomas, a PSA spokesman, declined to comment by phone.
That gives Marchionne time to look for a larger or healthier partner.
PSA isn’t his preferred choice because its 2.9 million vehicles sold last year -- about 60 percent of which were delivered in Europe -- don’t give him the massive scale he wants, the people said. PSA also has joint ventures in China including one with Dongfeng Motor Corp., which owns 14 percent of the French carmaker. But it’s not as big a player there as GM or VW.
Marchionne could end up having to approach PSA, though, because all of the Asian players are, at best, tough to persuade to do a deal, said Maryann Keller, an independent auto-industry consultant in Stamford, Conn. Honda and Hyundai have never had an interest in deals and prefer to go it alone, aside from Hyundai’s alliance with Kia Motors Corp., she said.
Mazda is tied in with Toyota. The two companies signed a deal in May to explore ways to share fuel-saving technologies.
Suzuki is 19.9 percent-owned by Volkswagen and the two companies are locked in a legal dispute at a London arbitration court as the Japanese small-car specialist wants Europe’s largest automaker to return the shares it holds. VW has refused to do so.
GM once owned a stake in Suzuki and the partnership didn’t bear much fruit, so the Japanese company may be unlikely to get involved in another such deal, Keller said.
The alliance of Renault and Nissan Motor Corp. hasn’t been approached by Marchionne, Carlos Ghosn, the CEO of the French-Japanese giant, said in a June 3 interview. Ghosn said he prefers an alliance over Marchionne’s call for a full-blown merger.
One possibility being pondered is to get an activist investor who would be interested in buying a stake in GM and using its position to pressure Barra and the board. Marchionne has been contacting some large institutional investment funds to gauge interest, said the people.
His advisers haven’t contacted many hedge funds or the investment firms that pressured GM to buy back shares earlier this year, nor have they contacted Warren Buffett’s Berkshire Hathaway Inc., people said. Berkshire is GM’s ninth-largest shareholder with 2.6 percent of the stock.
Instead, Marchionne’s camp has been talking to large institutional investment funds that are often found among the top 10 shareholders of large companies, one of the people said.
An activist investor like Dan Loeb’s Third Point LLC or Bill Ackman’s Pershing Square Capital could certainly exert real pressure on Barra, but they would be unlikely to take up the cause if they didn’t see a short battle and a fast return, said Erik Gordon, a professor at the University of Michigan’s Ross School of Business.
“An activist would have to buy a chunk of GM stock and risk it plummeting on the announcement of a merger with FCA because, at the very least, a large number of GM stockholders will be alarmed by the idea,” Gordon said. “Activists want to force an event that catalyzes a quick increase in the stock price.”
In its pursuit of GM, Marchionne could make a hostile all-equity offer, Max Warburton, a Singapore-based analyst with Sanford C. Bernstein, suggested Thursday in a note evaluating the prospects of a hostile takeover.
“The mechanics of a bid look beyond ambitious. But stranger things have happened, especially in bubbly equity markets,” Warburton said.
For her part, Barra said GM has no plans to merge and doesn’t need a takeover defense.
“When I look at it, my focus is on the GM shareholder,” she said Tuesday. “That’s going to generate the most value.”