Not merging is equally tough for FCA and Renault

Since Fiat Chrysler Automobiles submitted its proposal May 27 for a merger with Renault Group, the industry has been closely monitoring whether they will combine. After an initially positive reaction, doubts arose in France on some details of the deal and its effect on the alliance between Renault and Japanese partner Nissan.

When the French government, Renault's largest-single shareholder, asked for some extra time to conclude the merger, FCA Chairman John Elkann abruptly ended negotiations. After a few days blaming each other, negotiations restarted in secret, with the companies refusing to confirm talks had resumed. Sources say the companies are still talking, but they are doing so outside the media spotlight.

Despite the setback, top executives at FCA and Renault continued to speak positively about the deal. "The project remains, in my head, absolutely remarkable and exceptional," Renault Chairman Jean-Dominique Senard told shareholders June 12. At Nissan's shareholders meeting on June 25, Senard said the Japanese automaker missed a golden opportunity to cash in on a blockbuster tie-up. “This project, at the time, was incredibly beneficial to Nissan. That is the truth and reality," he said.

In the media release announcing that it had pulled the Renault offer, FCA said it remained "firmly convinced of the compelling, transformational rationale" of the deal. The remaining players at the table -- the French government and Nissan -- sounded more cautious but didn't openly oppose the logic of the proposed merger.

In its offer, FCA touted 5 billion euros ($5.6 billion) in annual savings from synergies. Those would mainly come from Europe and Latin America, where FCA's and Renault's businesses overlap the most. In this light, the deal still makes sense, many analysts say.

Philippe Houchois of Jefferies wrote that it is "hard to disagree with the logic and with net synergies of 5 billion euros versus implementation costs of 3 to 4 billion."

UBS pointed to the "strong potential of synergies in Europe, [given the] substantial product and platform overlap." This would be a deal aimed at building a sustainable business in Europe and Brazil, wrote Max Warburton of Alliance Bernstein -- one of the analysts most skeptical about the outcome.

To envisage potential synergies is one thing. To turn them into actual savings is another story. Elkann's mentor, the late FCA CEO Sergio Marchionne, saw this quite clearly. In a 2008 interview, just a few months before embarking on the Chrysler Group takeover, Marchionne said: "Mergers in the car industry never work. On paper, they are the best solution. But it's nearly impossible to merge different cultures, technologies, product architectures and sales networks."

Marchionne was more of a tactician than a strategist, which explains his sudden about-face on the matter. After successfully merging Fiat and Chrysler into FCA, he became a fervent supporter of the need to consolidate, with his famous 2015 speech titled "Confessions of a Capital Junkie."

The FCA merger is one of the few positive M&A in the car industry, although it profited from some favorable conditions: Chrysler was bankrupt, and the new management had a free hand in closing plants and cutting the workforce; dealerships could be dropped; and the unions had to approve costly concessions and came on board as the main shareholder.

Those conditions are not available to FCA and Renault. The recent takeover of Opel/Vauxhall by PSA Group, though, has shown that even in Europe, smart management can extract synergies and bring a chronic money-loser back to profit in a relatively short time, without resorting to heavy and politically unpalatable job cuts.

Both the pros Marchionne listed in his 2015 presentation and the cons he described in his 2008 interview still stand. Some of the reasons he put forward in 2015 have actually become more relevant with time, as is the case of investments in new technologies. A study by consultancy AlixPartners estimated that 2017 total capital expenditures and r&d costs at the 13 largest global automakers totaled $200 billion, a 55 percent increase from 2012.

Working together, FCA and Renault could save billions on investments in electrification and autonomous-driving technologies. At the same time, the political complexity of integrating different cultures would only increase by adding FCA to an already fractious Renault-Nissan relationship.

The complex FCA-Renault negotiations might completely break down by the time you read this. But even so, the need to share costs and the debate on the rationale behind mergers will not go away anytime soon.