Dec. 21, 2004
GM's nimbler acquisition strategy beat out DaimlerChrysler for Fiat.

The battle had been brewing for months, although no one really knew it. The rumor mills were running rampant in recent weeks on news that Fiat Auto and DaimlerChrysler AG were on the verge of announcing a partnership. Then, out of the blue, came General Motors Corp. chairman Jack Smith and his crew, who swooped in and took the golden goose away from DaimlerChrysler CEO Jrgen Schrempp. The Germans have to be seeing red, while the folks at GM are no doubt patting themselves on the back in celebration for their victory. What does the recent partnership provide GM and Fiat Auto? For GM the 20% equity stake gives the world's largest automaker an open door to acquiring the rest of the company, albeit for the lofty price of $10 billion. Besides that, GM would gain economies of scale only dreamed of by other automakers. It can now spread its component and European-based product development costs over three more brands (Fiat, Alfa Romeo, and Maserati) in addition to GM's Opel and Vauxhall brands. Beyond Europe, GM also can leverage Fiat's small-car-development know-how and powertrain expertise in Asia via its existing equity stakes in Isuzu, Suzuki, and Fuji Heavy Industries Ltd. (which owns Subaru). The benefits could be expanded even further if GM ends up with South Korea's Daewoo Motors, which is currently up for auction. What do Fiat Auto's leaders get out of the pact? First and foremost, they align themselves with the world's largest automaker, which itself can provide huge economies of scale. They also have received a firm commitment that Fiat will continue to run the way it is, despite GM becoming a major shareholder. While it's true that GM president and COO (soon to be CEO) Rick Wagoner and Fiat CEO Paolo Cantarella will now share equal power over Fiat as part of a steering committee, that doesn't mean GM will micromanage the company. Let's use Suzuki and Isuzu as examples. While GM owns equity stakes in both companies, they continue to run independent of the GM organization. Sure, GM executives peer over the glass every so often to see if there's sharing and cost savings opportunities, but beyond that, GM has a hands-off policy. That's how they'll run Fiat, unless Fiat's leadership and the Agnelli family, who helped found the Italian automaker, decide to bow out. Then GM will have the opportunity to buy the remaining stake in Fiat and embrace the company within the GM family. While Wagoner and Smith deny imminent plans to acquire the remainder of Fiat, Wagoner said "you never know what the future holds," during a press conference announcing the Mar. 13 deal. That's got to sting the folks at DaimlerChrysler, who reportedly were extremely close to wrapping up a deal with Fiat's leadership when GM moved in. DaimlerChrysler didn't want to budge on the topic of full ownership of Fiat. It wanted 100% ownership, lock, stock and barrel. The Agnellis wouldn't hear of it. News of the differences between the German and Italian leaders made its way back across the ocean to GM's headquarters, at which time GM's leadership stood up and took notice. Unlike DaimlerChrysler, which has repeatedly said it wants to acquire companies, GM has taken the position that it wants to partner with companies so that GM can enjoy economies of scale without spending enormous capital to get control of the company. Additionally, the Fiat partnership provides GM's leadership with an opportunity to mold the company into a picture perfect acquisition target. Then, when the fifth year of the partnership arrives, and GM has to make a decision on Fiat's future, it'll move in and buy the rest. That's similar to the strategy GM used with Sweden's Saab Automobile when it purchased the remaining 50% equity stake in January. While GM won't count Fiat's sales under its European operations or show any of Fiat's revenues on its balance sheet, expect to see some of GM's top executives signing up for Italian language courses.
Kevin Kelly writes on the auto industry for Bridge News.

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