Fiat Chrysler CEO continues pursuit of General Motors

Fiat Chrysler CEO Sergio Marchionne may have ratcheted up the rhetoric surrounding a potential merger with General Motors but — at least for now — it doesn't appear his idea will be gaining traction anytime soon, even though the potential cost savings are vast.

That's too bad, according to former Chrysler CEO Tom LaSorda, who in 2008, along with then-GM CEO Fritz Henderson, led a review of the benefits of a combination of the two automakers as they faced monstrous market headwinds at the time.

“His point is, ‘What's the harm in sitting down for two hours, here’s my pitch and you guys can digest it?’ " LaSorda said. "Maybe the guy’s got some stuff there that’s pretty cool. He’s very detailed, very smart, knows product probably better than most of these CEOs, and knows the financials better than most.”

LaSorda believes the two automakers could save money through product development costs and by sharing major systems such as engines and transmissions. LaSorda said the alliance between Renault and Nissan, led by CEO Carlos Ghosn, has been profitable with the companies finding ways to share development costs. It should be viewed as a potential model, he said. Still, LaSorda predicts Marchionne won't be able to force a merger.

"The problem I think everybody gets into is, ‘Who’s going to run it?’ It gets to be those kind of issues," LaSorda said. "(A merger) could reap huge benefits if people could just put everything aside and said, ‘OK, what’s going to be best for both of us?,’ instead of ‘Who’s going to be running it?’ …I think Sergio’s right.”

Marchionne, in an interview published Sunday, told a trade publication Automotive News that the potential cost savings from a merger are far too big for GM's board to ignore — and he stopped just short of saying he's willing to pursue a hostile takeover of the much larger automaker.

The mercurial CEO initially approached GM CEO Mary Barra in March but hasn't sent any additional proposals since then, according to a person familiar with the situation who could not be named because of the sensitivity of the matter. There are no meetings scheduled between the CEOs or GM's board of directors, and it's unlikely the automaker's board will agree to meet with Marchionne.

Marchionne: Job loss predictions 'nonsense'

Fiat Chrysler Automobiles also is a larger and more global company than Chrysler was in 2008, and that presents additional complications. Chrysler, which went bankruptcy in 2009, was acquired by Fiat and now has a huge presence in Italy though its Italian counterpart. GM also has a large presence in Europe through Opel, which has factories in Germany.

Richard Hilgert, an analyst with Morningstar, said Marchionne is pursuing a solution that is fraught with risk and would require the elimination of brands, dealers and workers.

"This is not something that should be pursued," Hilgert said. "We are talking about a company with a combined total of 11 brands between GM and Fiat Chrysler in the North American market. At GM's peak, they had 10 (brands) and they got rid of 6."

Because of strict U.S. franchise laws, it could take years to eliminate a single brand, Hilgert said.

"You run the risk of what everybody complained about with GM a decade ago — 'badge engineering,' " he said.

In July, Marchionne called suggestions that the combined company would have too many brands and too many plants "nonsense" and said a merger of the two companies would not result in blue collar job losses.

"The doom and gloom of reductions, and headcounts, plants shutdowns — this is nonsense. I don’t have enough capacity today, why would I do it?" Marchionne said in July. "(A merger) has zero to do with distribution, zero to do with brand structure and nothing to do with anything. Who says that you have too many brands. Who the hell said that and why? If your distribution networks are different, why do you need to go kill brands?"

"The real benefit of all of this is to shrink the investment in R&D and capital equipment," Marchionne said at the time.

Rejection by Barra

The outspoken CEO sent Barra an e-mail in March outlining his idea and the reasons he thinks it makes sense. Since then, Barra has said publicly and privately that the Detroit automaker has no interest in exploring the idea.

"We already have scale, and we are leveraging that scale," Barra said in June. "When you look at the last several years we have been merging with ourselves."

GM said Sunday night that it has thoroughly studied and rejected Marchionne's proposal.

"Our management and board are always working to maximize shareholder value. After we completed a thorough review of a possible merger with FCA, we concluded that executing our current plan is the best way to create value for GM stockholders," GM said in an e-mailed statement Sunday.

'Confessions of a Capital Junkie'

Marchionne's pursuit of GM became public shortly after he presented Wall Street analysts with a presentation he called "Confessions of a Capital Junkie" on April 29.

In it, Marchionne stunned analysts and investors as he laid out an argument that urged industry consolidation.

Marchionne said the automotive industry consumes billions of capital investment annually at a rate that exceeds most other industries. And he argued that the pace of that capital consumption will increase in the coming years as automakers work furiously to develop new infotainment technology, meet stricter environmental regulations and develop alternative fuel vehicles and technology for autonomous vehicles.

Mergers between automakers must occur, Marchionne concluded, to cut costs and survive — even though auto sales in the U.S. will exceed 17 million new cars and trucks this year and GM and Ford are recording record North American profits.

Hilgert and others say Marchionne's diagnosis of the problem is correct, but disagree with his solution.

Hostile bid intentions?

Despite the resistance, Marchionne on Sunday came close to saying he would pursue a hostile merger with GM.

"Not hostile," he told the publication. "There are varying degrees of hugs. I can hug you nicely, I can hug you tightly, I can hug you like a bear, I can really hug you. Everything starts with physical contact.

"Then it can degrade, but it starts with physical contact."

Marchoinne also told Automotive News that a merger between the two automakers could generate up to $30 billion annually in earnings before taxes, amortization and depreciation.

"Look, the combined entity can make $30 billion a year in cash. Thirty. Just think about that [expletive] number," Marchionne told the publication. "In steady-state environments, it'll make me $28 to $30 billion," at a seasonally adjusted annual selling rate of 17 million new cars and trucks in the U.S.

His estimates are not that big of a stretch. It should be pointed out that the two companies' combined earnings before taxes, depreciation and amortization topped $26 billion in 2014. GM earned $16.4 billion, excluding recall costs, while Fiat Chrysler earned $9.8 billion using currency exchange rates on Dec. 31, 2014.

Keep an eye on Exor

Anybody watching Marchionne's aggressive overtures toward GM should understand that the CEO has the full backing and trust of John Elkann, the great-great-grandson of Fiat founder Giovanni Agnelli.

Elkann is the chairman of Fiat and Exor, a private equity fund based in Turin, Italy, that manages $14.5 billion in investments. Those investments include a 29.16% stake in Fiat Chrysler Automobiles.

Elkann is beginning to emerge as an investor who is willing to make aggressive, bold moves when it comes to mergers and acquisitions. Earlier this year he appointed Marchionne to serve as Exor's vice chairman.

In August, Exor reached an agreement to acquire PartnerRe, a global reinsurance company, for $6.9 billion after launching an unsolicited bid for the company earlier in the year that overcame an existing bid from another company.

Contact Brent Snavely: 313-222-6512 or bsnavely@freepress.com. Follow him on Twitter @BrentSnavely.