The merger of PSA Group and Fiat Chrysler Automobiles is the largest transaction involving two automakers since the takeover of Chrysler by Daimler some two decades ago.
It's the most dramatic response yet by the industry to the demise of the combustion engine and the massive expense of investing in electric vehicles.
So why aren't investors more excited? PSA shares have fallen about 10 percent since news of the talks with FCA first leaked at the end of October. FCA's have gained about 16 percent.
Before the deal emerged, PSA was valued more highly than Fiat but that has reversed. PSA investors think FCA is getting a better deal and they do not seem to believe the merger will create much value.
And, in fairness, the history of automotive mergers is not a happy one: Daimler and Chrysler's failed marriage is a textbook example of the culture clashes that supposed "mergers of equals" can spawn.
Yet PSA and FCA seem much closer philosophically -- both sets of managers are firmly committed to creating value for shareholders, something you can't always say of large manufacturers -- and they have ample reason to try to make this tie-up work.
The memorandum of understanding unveiled on Wednesday at least attempts to address PSA investors' frustration with the initial deal terms. FCA will still pay its shareholders -- including the billionaire Agnelli family -- an extremely generous 5.5 billion euro ($6.1 billion) special dividend before the deal closes, even though its balance sheet is comparatively weak, and it is exposed to far greater legal risks (involving diesel, tax and alleged trade union malfeasance).
PSA shareholders will get a distribution worth around 3.2 billion euros.
Size matters
To try to balance things out a little, FCA plans to keep its holdings in robot-maker Comau until after the deal closes, meaning an estimated 250 million euro proceeds from a sale will be shared equally by both sets of shareholders.
Even so, the French side is being very generous financially in exchange for gaining control of the boardroom. PSA boss Carlos Tavares will have the casting vote. Is it worth it?
Tavares has shown it is possible to make money in Europe, where PSA sells 80 percent of its vehicles. But the continent is probably going to be a brutal market for the next few years.
Automakers there may be obliged to offer big discounts to persuade customers to purchase electric vehicles and thus help the automakers avoid regulatory fines.
PSA's impressive margins -- it achieved an 8.7 percent automotive operating margin in the first half of 2019 -- might not last forever.
By contrast, FCA's North American truck and SUV business accounts for about two-thirds of its revenue and should not be as vulnerable to regulatory upheaval. President Donald Trump is not a fan of stringent fuel economy rules.
The two parties are ruling out plant closures but still expect to generate 3.7 billion euros in yearly cost-savings. Taxed, capitalized and adjusted for the cost and time the savings will take to achieve, these are worth around 4 billion euros to each side.
Tavares's record of turning around businesses is certainly impressive. He transformed PSA and then repeated the trick with the Opel/Vauxhall unit acquired from General Motors.
Fiat will not offer as many quick wins: The Italian automaker has already slashed costs and optimized its working capital. But savings from common vehicle platforms and purchasing could be substantial.
It is probably unrealistic to expect shareholders to price in all the promised benefits now. Tavares will have to show them that not all marriages are doomed to fail.
