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University of Economics, Prague

International Business Central European Business Realities

Mergers & Acquisitions Case Study

Author: Sebastiano Vedele

Thesis instructor: Doc. Ing. Josef Tauer
Scholar year: 2012/2013

I hereby declare that I am the sole author of the thesis entitled Thesis Title. I duly marked
out all quotations. The used literature and sources are stated in the attached list of references.

In Prague on September 20, 2012

Sebastiano Vedele

I hereby wish to express my appreciation and gratitude to the supervisor of my thesis,
Doc. Ing. Josef Tauer. I am really grateful to Mr. Tauer because he was always giving to me
advices on how to write my thesis. What is more I also want to thank Prof. Tauer not only
because it was my supervisor and he followed me during all these months to write the thesis
but also because it's always been friendly and helpful when I had a problem. In this regard, I
can say that it was an honor for me to have had a supervisor as Mr. Tauer.
Thank you very much Mr. Tauer.

Furthermore I also would like to say thanks to my family, to my father that is not with me
since many years but he is always present for me. To my mother who I could never say thank
you enough. To my brother who I love so much.

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Introduction ..............................................................................................................................6
1. Chapter 1: Mergers and Acquisition..................................................................................8
1.1. Merger: definition, classification, history, distinction between M&A ...............................9
1.2. Acquisition: definition, classification, motives behind M&A ..........................................12
1.3. M&A: steps to make deal successful, way of financing, business valuation ...................16
2. Chapter 2: Case study. Fiat acquires Chrysler. Figures of the Deal .............................21
2.1. History of Chrysler ...........................................................................................................22
2.2. Merge with Daimler Benz..24
2.3. Cerberus Capital Management....26
2.4. History of Fiat.27
2.5. The strange alliance Fiat / GM....30
2.6. 2004: a particular year for Fiat33
2.7. Sergio Marchionne..35
3. Chapter 3: The deal between Fiat and Chrysler. Steps ..................................................37
3.1. The deal .............................................................................................................................38
3.2. The recovery plan of Chrysler45
3.3. The U.S. Bankruptcy Procedure through the Chapter 11...46
3.4. The union agreement..48
3.5. Business valuation..50
3.6. Main reasons behind the deal.52
3.7. Negotiations between May and June 2009.57
3.7.1. January 10, 2011..60
3.7.2. April 12, 2011..57
3.7.3. May 24, 2011...59
3.7.4. June 3, 2011.60
3.7.5. July 21, 201161
3.7.6. January 5, 201262
3.7.6. July 3, 2012..63

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3.8. Fiat and Chrysler after the deal: comparison64

3.9. Fiat plan 2010 / 2014 financial targets..67
Conclusion ......................................................................................................................77
Bibliography .......................................................................................................................79
Figure 1 ....................................................................................................................................32
Figure 2 ....................................................................................................................................43
Figure 3 ....................................................................................................................................69
Figure 4 ....................................................................................................................................70
Figure 5 ....................................................................................................................................71
Figure 6.72
Figure 7.76

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To begin with, I would like to explain why I have chosen Mergers & Acquisitions as my
thesis topic. First of all, in the next future I might be interested in working in this area;
furthermore I want to have deeper understanding how the M&A market works. I have a lot of
questions which I am seeking the answer for and I hope that this thesis will help me to make
most things clear.
The aim of the thesis is to generally analyze the topic of M&A and after that study deeply
the acquisition of Chrysler from Fiat.
The thesis is divided into three parts.
The thesis is divided into three parts and is developed through two main objectives: to
address the issue of Mergers & Acquisitions and analyze deeply the deal between Fiat and
Chrysler. The first part is theoretical and talks in generally way about Mergers and Acquisitions
through definitions and differences, emphasizing what are the reasons why a company decides to
implement an acquisition or merger.
It is a well-known fact that the development of the global economy predetermines
mergers and acquisitions. It is obvious, only the strongest survives in an increasingly competitive
world and as a rule stronger competitors become larger. Companies with niche strategies which
offer something unique or what is difficult to repeat should be mentioned here as the exceptions.
In general, survival for small and medium-sized businesses during an economic crisis is
very difficult. Competing on cost and cost savings can only be achieved on a large scale. Credit
sources are difficult to find and the costs are high. In these circumstances, many owners of small
and medium-sized businesses are interested in selling their business. At the same time, massive
deal making could be the right way large corporations, which have generated huge profits
through cost-cutting in recent years, can keep their margins relatively high in a slow-growth
economic environment.
After having explained why M&A play a significant role especially nowadays, the work
will continue with the Study Case which regards the acquisition of Chrysler from Fiat. The Study
Case regards the second and the third part of the thesis.

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The second part discusses the major figures who have signed the agreement between Fiat
and Chrysler. This part also regards general information about Fiat and Chrysler, history, figures,
and data about both cars factory.
The third part is about the final agreement between the two automakers and highlights all
the steps that led to the realization of the acquisition of Chrysler by Fiat. This is done analyzing
carefully all data from the very beginning until nowadays going deeply through numbers,
percentages, and amounts of the acquisition.
Finally the work will be followed by conclusions.

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Chapter 1

Mergers and Acquisitions

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1.1 Mergers: definition, classification, history,

distinction between M&A.

Merger is the combining of two or more companies, generally by offering the

stockholders of one company securities in the acquiring company in exchange for the surrender
of their stock1, ( Legally, one of those firms which are going to merge ceases
to exist and the new combined firm operates in the market under the name of the survivor
firm2, (Donald M. DePamphilis, 2010).
Mergers can be classified by:

Forward Triangular Mergers (when the subsidiarys equity merges with the

target firms stock. As a result of the merger, the target becomes a part of the original
subsidiary of the acquirer).

Reverse Triangular Mergers (when the merger proceeds in the same

manner as a triangular merger except the subsidiary is merged into the target corporation. The
advantage of this merger is that the target corporation will become a wholly-owned subsidiary of
the acquiring corporation without any change in its corporate existence).

Business Mergers. This term is used to describe the combining of two


The other classification of mergers includes: vertical mergers, horizontal mergers,

conglomerate mergers, market extension mergers, and product extension mergers. This can be
either a complete merger where all aspects of the two companies are combined or a partial
merger where only certain parts or responsibilities are now one.;

Donald M. DePamphilis Mergers, Acquisitions, and Other Restructuring Activities: An Integrated Approach to
Process, Tools, Cases, and Solutions, 5th edition, Elsevier Academic Press, 2010, Page 18.

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A vertical merger is one of the most common types of mergers. When one company is a
supplier of raw materials for another company, production costs are declined and profit is
Horizontal mergers are types of mergers that involve companies in direct competition
with one another. Often horizontal mergers are considered hostile, which means a larger
company takes over a smaller one in more of an acquisition than a merger. An example of a
horizontal merger in the traditional sense is the combination of car companies Chrysler and
Daimler Benz. Both companies wanted the merger and once combined were called
Daimler Chrysler. In the Daimler Chrysler case, there was synergy in market share, financial
obligations, and operating costs that made the resulting company better than the two companies
had been separately.
Conglomerate mergers are types of mergers that are in different market businesses. There
is no relationship between the types of business one company is in and the type the other is in.
The merger is typically part of a desire on the part of one company to grow its financial
wealth. By merging with a completely unrelated, but often equally profitable company, the
resulting conglomerate gains a revenue stream in many types of industries.
Market extension is similar to horizontal mergers in that the companies merging produce
the same types of products. The difference, however, is: the companies are not in direct
competition with one another. Instead, they compete in different markets.
Product extension mergers are the same as conglomerate merger in which merging firms
are not competitors, but use common or related production processes and/or marketing and
distribution channels.
As seen from past experience, mergers and acquisitions are triggered by economic
factors. The macroeconomic environment, which includes the growth in GDP, interest rates and
monetary policies, plays a key role in designing the process of mergers or acquisitions between
companies or organizations. Tracing back to history, mergers and acquisitions have evolved in
five stages and each of these is discussed here3, (Martin Lipton, 2006):

Martin Lipton Mergers and merger waves and the factors that give rise to them have been the subject of intense
interest for more than a century September 14, 2006, page 4.

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First Wave Mergers. During this phase mergers occurred between

companies which enjoyed monopoly over their lines of production like railroads, electricity etc.
These were mostly horizontal mergers that took place between heavy manufacturing industries.
The failure was fuelled by the slowdown of the economy in 1903 followed by the stock market
crash of 1904.

Second Wave Mergers took place between oligopolies rather than

monopolies like in the previous phase. They were mainly horizontal or conglomerate in nature.
The industries that went for merger during this phase were producers of primary metals, food
products, petroleum products, transportation equipment and chemicals. The second wave
mergers ended with the stock market crash in 1929 and the great depression.

Third Wave Mergers were mainly conglomerate mergers. Mergers were

inspired by high stock prices, interest rates and strict enforcement of antitrust laws.

Fourth Wave Mergers took place between the oil and gas industries,

pharmaceutical industries, banking and airline industries.

Fifth Wave Mergers (1992-2000) were inspired by globalization, stock-

market boom and deregulation. They took place mainly in the banking and telecommunications
industries. Hence we may conclude that the evolution of mergers and acquisitions has been long
Although the terms merger and acquisition are often used as though they are
synonymous, they mean different things. The differences between a merger and acquisition are
important to value, negotiate, and structure a clients transaction. Mergers and acquisitions both
involve one or multiple companies purchasing all or part of another company. The main
distinction between a merger and an acquisition is how they are financed.
A merger happens when two firms often of about the same size, agree to move forward
and exist as a single new company rather than remain separately owned and operated. This kind
of action is more specifically referred to as a merger of equals. Mergers are often financed by a

Martin Lipton Mergers and merger waves and the factors that give rise to them have been the subject of intense
interest for more than a century September 14, 2006, page 4.

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stock swap in which the stock owners in both companies receive an equivalent quantity of stock
in the new company. The stocks of both companies are surrendered and new company stock is
issued in its place.
On the other hand, when one company takes over another company and clearly
establishes itself as the new owner, the purchase is called an acquisition. Legally, the target
company ceases to exist, the buyer swallows the business and the buyers stock continues to be
traded. Acquisition refers to two unequal companies becoming one and the financing can involve
a cash and debt combination, all cash, stocks or other equity of the company.
Whether a purchase is considered a merger or an acquisition, in reality depends on
whether the purchase is friendly or hostile and how it is announced. In other words, the actual
difference lies in how the purchase is communicated to and received by the target companys
board of directors, shareholders, and employees, as well as the Prof. of New York University
Ian Giddy stated5.

1.2 Acquisitions: definition, classification, motives

behind M&A.

The word Acquisition describes a corporate action in which a company buys most, if not
all, of the target companys ownership stakes in order to assume control of the target firm6,
( There is another term close to acquisition, called Takeover. There is no
tangible difference between them. The only distinction is that takeover is used to reference a
hostile takeover where the company being acquired is resisting and acquisition is used to
describe more friendly process.
Acquisitions can be friendly or hostile events. In a friendly acquisition, the managers of
the target firm welcome the acquisition and, in some cases, seek it out. In a hostile acquisition,

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the target firms management does not want to be acquired. The acquiring firm offers a price
higher than the target firms market price prior to the acquisition and invites stockholders in the
target firm to tender their shares for the price.
In either friendly or hostile acquisitions, the difference between the acquisition price and
the market price prior to the acquisition is called the acquisition premium. The acquisition price
in the context of mergers and consolidations is the price that will be paid by the acquiring firm
for each of the target firms shares. This price is usually based upon negotiations between the
acquiring firm and the target firms managers. In a tender offer, it is the price at which the
acquiring firm receives enough shares to gain control of the target firm. This price may be higher
than the initial price offered by the acquirer, if there are other firms bidding for the same target
firm or if an insufficient number of stockholders tender at that initial price.
There is one final comparison that can be made and that is between the price paid on the
acquisition and the accounting book value of the equity in the firm being acquired.
Depending upon how the acquisition is accounted for, this difference will be recorded as
goodwill on the acquiring firms books or not be recorded at all.
For better understanding of acquisition it is necessary to look through the motives behind
it. As Merger and Acquisition both have the same idea, it will be correct to talk about the
motives behind both merger and acquisition.
Through M&A firms try to improve their financial performances for many
reasons like the following7, (Prof. Ian Giddy, New York University):

Economy of scale.

Economy of scope.

Increased revenue or market share.




Geographical or other diversification8.;

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Resource transfer.

Vertical integration.

Absorption of similar businesses under single management.

Furthermore, there are additional reasons for Merger and Acquisitions that may not add
shareholder value include9:


Managers hubris.


Managers compensation.

Lets take a closer look at synergy. Synergy is one of the main reasons behind many
mergers and acquisitions. Bhide (1993)10 studied the reasons reported in 77 overs between 1985
and 1986 and concluded that operate in synergy was the key aspect of a third of them. There are
many studies relating to verify whether there is synergy and if it exists it is productive.
If synergy is perceived to exist in a takeover, the value of the combined firm should be greater
than the sum of the values of the bidding and target firms, operating independently11,
(, page 11 and 12):

V(AB) > V(A) + V(B),


V(AB) = Value of a firm created by combining A and B (Synergy).

V(A) = Value of firm A, operating independently.
V(B) = Value of firm B, operating independently12.;



12, page 12.

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Results of studies of stock returns around merger announcements said that the value of
the combined firm does increase in most takeovers and that the increase is significant13.
The existence of synergy generally implies that the combined firm will become more
profitable or grow at a faster rate after the merger than will the firms operating separately.
There are two types of Synergy sources.

Sources of Operating Synergy.

Operating synergies are synergies that allow firms to increase their operating income,
increase growth or even both. It is possible to count four operating synergies14:
1. Economies of scale.
2. Greater pricing power.
3. Combination of different functional strengths.
4. Higher growth in new or existing markets.
Operating synergies can affect margins and growth, and through these the value of the
firms involved in the merger or acquisition.

Sources of Financial Synergy15.

With financial synergies, the payoff can take the form of either higher cash flows or a
lower cost of capital (discount rate). Included are the following16:
1. A combination of a firm with excess cash, or cash slack.
2. Debt capacity.
3. Tax benefits.
Obviously, synergy has a potential in many mergers. It is important to understand if the
synergy may be valued and how it can be done.

13, page 12;

14, page 10;

15, pages 10, 11;

16, pages 10, 11.

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1.3 M&A: steps to make deal successful, way of

financing, business valuation.

When a company wants to acquire another company in a merger or in acquisition there

are several steps to achieve this process. When you come across these obstacles you need a
solution to dealing with them to have an end result beneficial to both sides. How can a Merger
and Acquisition work smoothly? There are steps to make this a reality. The first step is a new
entity. In this first step everyone has to have understanding of the fact that the two companies
forging the merger will not be the same. The overall organizational structure of the company will
not be the same as it will change for the better. There will be a new culture being fostered in the
new organization. There are many key ingredients such as Strategy, Motives, Price, Fit,
Integration, and Ownership which are tools to a winning Merger & Acquisition. In Strategy
phase what are the reasons for this Merger & Acquisition? Most companys reasons are
complementary product lines, pioneering technical skills, new markets, new customers and
leveraging their existing infrastructure or vertical integration. The next tool is motives. What are
the companys reasons for the M&A17,18? There has to be an understanding from both sides.
Why is the company being sold? Understanding the reasons behind it will be useful in the
negotiation process. You want this information to make the process beneficial to both sides.
They should also be asking why they want this particular company. Next step is the Price. There
is valuation of each company and set prices for M&A so if a company does not meet an asking
price then this might also make the deal fall through. Next step is fit. Will these two companies
fit well together or not? It is a critical factor in the M&A process. If you feel the two companies
cannot fit together then there is no use to continue any further with any M&A. There are some
other questions a company should ask before moving further in the progression.


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These questions are: can the new executive build up and speak with one tone? Will the
employees of the two companies insult the company? You want to ask these questions because in
M&A sometimes there are layoffs and the employees being laid off usually do not say very good
things about the company. They are not there anymore and any parting harsh words are their
form of comfort. Will makeup of both companies keep customers away? If they can answer these
questions in a positive way then the process of M&A can continue. The most important part is
the Integration of both companies. Could both companies be gelled together to work as one or
will there be friction on both sides. It is recommended that prior to M&A you have a team or
plan in place for the integration as it is critical part of the M&A. The last step is Ownership and
usually you want someone who is very deep in the company and in the process of M&A. You
need someone that can bring the new company forward with limited problems. You need leaders
in place in every department with strong qualities. If all this steps are met, the process to M&A is
underway then.
We have touched on Steps to make an M&A successful. Now it is possible to take a look
at financing of an M&A.
When we think of investment bankers many of us just simply refer to them as the
employees that work on Wall Street. They do work on Wall Street but they are also a crucial
asset to M&A financing. They deal with bridging two companies together as well as dissolving
them. The two main forms of financing for Mergers & Acquisitions are in the form of cash or
stocks. Mergers and Acquisitions are differentiated by the way which they are financed. The cash
form of financing is basically when there is a payment of cash. Cash payments are most common
in acquisitions19 rather than mergers because the shareholders of the probable target company are
removed from the picture and the target company comes under the control of the bidders
shareholders. In acquisitions you are buying another company while in mergers you are bringing
two companies together. The other form which is of financing is in the form of stocks. There is a
payment in the acquiring companys stock, issued to the shareholders of the acquired company at
a given ratio relative to the evaluation of the stock price of the target company. Not each type of
financing is right for Mergers & Acquisitions but the valuation is done by the investment bankers

Q Finance (2009).Mergers and Acquisition checklist.

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who play a big role in Mergers & Acquisitions. The next step we will be moving towards is how
these Mergers are and Acquisitions valuated.
Before there could be a Merger and Acquisition, valuation is done to estimate the worth
of each company. What is a Business valuation? According to
Business valuation is the process and a set of procedures used to estimate the economic
value of an owners interest in a business. Valuation is used by financial market participants to
determine the price they are willing to pay or receive as a compensation for the sale of a
Now we know the basic understanding of business valuation. Now let us take a look at
the approach of business valuation. There are many approaches and we will only touch on some
of the important ones.
The first step is the standard and promise of value. In this stage the valuation needs to
identify the reasons and circumstances why the business valuation is being prepared. There are
certain checklists used in order to determine the business valuation. Economic conditions,
financial analysis, Normalization of financial statements, Income-asset and market approaches,
discount or capitalization rates, Capital Asset Pricing Model (CAPM), Weighted Average of
Capital (WACC) and Build up Method are just some of the methods used in business valuation.
Economic conditions include the review of national, local and regional economic conditions
present day at the time of the valuation. Financial Analysis deals with financial statements which
involve common size analysis, (liquidity, profitability and turnover), trend analysis and
comparative analysis of the companies involved.
Normalization of financial statements is broken down into four sub categories.
Comparability adjustments deal with the company adjusting their financial statement to facilitate
a contrast between the subject company and other businesses in the same industry. NonOperating adjustments are omitted from the financial statements analysis. Non recurring
adjustments are when the subjects company is affected by an event that happened once but is
most unlikely to happen again in the future like sale of assets, larger revenue expense or lawsuits.
Discretionary Adjustments deals with level of compensation paid to top executives being equal


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to the market value in the same industry. Income, in asset approach the business is equal to the
sum of each part. These methods are used to determine the value of the business.
The following figures, the sum of which determines the market value: Fair market value
of fixed assets and equipment (FMV / FA) - This is the price you would pay on the open market
to purchase the assets or equipment. Leasehold Improvements (LI) - These are the changes to the
physical property that would be considered part of the property if you were to sell it or not renew
a lease. Owner Benefit (OB) - This is the sellers discretionary cash for one year; you can get this
from the adjusted income statement. Inventory (I) - Wholesale value of inventory, including raw
materials, work-in-progress, and finished goods or products21.
Discounted Cash Flow (DCF) - In plain discounted cash flow tries to work out the value
of a company today, based on projections of how much money its going to make in the future.
DCF analysis says that a company is worth all of the cash that it could make available to
investors in the future.

DPV = FV / (1+i) ^ n = FV (1-d) ^ n


DPV - discounted present value of the future cash flow;

FV - future value of the cash flow;
i - interest rate reflecting the cost of tying up the cash for the investment;
n - number of years until the new cash flow materializes;
d - discounted rate taken at the beginning of the year;


Reuters (2010). Mergers & Acquisitions.;


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Market based approach is a method of determining the value of a business, security, or an

intangible asset. This is done by either comparing to similar businesses, securities or intangible
assets that have been sold. The criteria for market approach include:

Asset vs. Stock sale data;

Size (by sales or employees);

Fixed asset ratios;

Geography (regional, U.S. only, etc.);


All these data are reviewed carefully by the appraisers of the date to determine their
These are the three different approaches used in most business valuations. Discount or
capitalization rates are used to determine the present day value of projected return of a business.
Capital asset Pricing (CAP) is used to establish the rational discount rate in business
valuations. Weighted average cost of capital is also used to determine the discount rate. This is
done by the cost of debt and cost of equity. The Buildup method is used to determine the after
tax net cash flow discount rate. These are just some of the basic techniques and principals used
to evaluate a business. It is a long and daunting analysis that needs to be carried out because in
the end both parties want what is best for them.


The Manager. (December 2006).Business Valuation.

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Chapter 2

Case study: Fiat acquires

Chrysler. Figures of the deal

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2.1 History of Chrysler24,25.

Chrysler was founded in 1925 by Walter Percy Chrysler took the name of Chrysler
Corporation. The automaker manages to obtain a quick success in the market; one of the main
merits that must be recognized is the introduction, (for the first time), the so-called wind tunnel
to optimize the car's lines depending on the aerodynamic penetration. The Chrysler Corporation,
thanks to the success achieved, succeeds immediately to implement policies of expansion, and so
two new sub-brands are established: Plymouth and De Soto; the first specialized in the
production of cars dedicated to the practicality, almost as if to counter the emphasis placed by
Chrysler on its luxury cars, the second instead, whose name refers to the famous Spanish
explorer Hernando De Soto, aims to produce machines, which at the time could be of opposing
valid marketed products from other automakers like General Motors, Studebaker, WillysKnight.
In the same year of the creation of the two sub-brands, (1928), Chrysler Corporation, is
expanding its portfolio with the acquisition of the Dodge Division, specialized in the production
of commercial vehicles, light and heavy. Founded by brothers Dodge, the original name was
Dodge Brothers Motor Vehicle Company. Thus, Chrysler starts to produce and to sell Dodgebranded vehicles used for the carriage of goods, provided with its own motor, which are different
from those who call themselves trailers or semi-trailers, because the latter are lacking and engine
are designed to be towed, road, from vehicles equipped with towing systems. A few years later,
(1930), almost hardly the success of the company, opened the New York Office26.
In 1934 one of the most famous cars of the 1930s is launched, the Chrysler Airflow, a car
whose target audience was primarily the upper middle class, which takes on a particular
significance in the history of automobiles because this was the first to demonstrate the
importance of aerodynamics in car design. Because of its advanced design for the time which



History of Chrysler;


History of Chrysler

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does not meet consumer taste, the automaker and its sub-brands Plymouth and De Soto, are
forced to move towards a more conventional lines production. During the period after the Second
World War are some of the most famous cars made by Chrysler, including the Chrysler 300 in
the 1950s and 1960s, which represents the first of a series of luxury flagships. Also in those
years is marketing the Windsor, one of the productions Chrysler passed into history, but one of
the most important activities carried out by the automaker in this period has been the
development and production of new engines to hemispherical head, called Hemi-equipped cars,
after their fifties, but also some sports cars of the 1960s, like the Plymouth Hemi Cuda and the
Dodge Charger. In 1966 Chrysler Europe is born as a result of the purchase of Chrysler by
Rootes and Simca brands like, whose products begin to be sold at some markets with Chrysler
brand, while others retained the original name.
The Rootes group was a British car company that came over time to group several British
brands like Singer, Humber, Hillman and Talbot, Chrysler's goal was to obtain new production
bases in Europe, in the wake of what has already been done previously by Ford and General
Motors. However, the situation inherited from Chrysler proves difficult because Rootes had
many brands, and some models of limited success as the Imp; despite this Chrysler's
management strategy involves the creation of two sub-divisions, Chrysler France formed by
Simca and Matra and Chrysler UK formed by the former Rootes group27. By the early 1970s, and
the oil crisis that characterizes this period, Chrysler sees squandered most of his assets because
of cuts in production and sales; the low sales of the cars are, in fact, the House on the verge of
bankruptcy, but Lee Iacocca manages to save the American group.
He, as the new CEO, introduces and implements new marketing strategies, launching new
products, such as the birth of the first minivan, aimed at niche markets, with which the company
has been a remarkable success, enough to revive its fortunes. With its revival, in the 1980s,
Chrysler buys 20% of another automaker: Mitsubishi, further expanding its offerings to low
range products and low-mid. But diversification strategies implemented by Chrysler Corporation
do not end here, in fact in 1987, buys also the AMC car company from which it inherits the
production of off-road vehicles, (Jeep), then cars belonging to the category "off road". In the
early 1990s, Chrysler intends a landfall in Europe, that it will have a greater success than the

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previous one, exporting machines like the Chrysler Voyager, a minivan that offers itself as a
direct competitor of products belonging to the same segment by other European carmakers like

2.2 Merge with Daimler Benz29,30.

In the late 1990s, Schrempp, Chief Executive Officer of major German industrial group
Daimler Benz, promotes the merger with Chrysler, with the purpose to create an integrated
company of technology. The latter when ante-merger is the third American Group for sales and
turnover, mainly active in two business areas: Automotive and Financial Service. The first
phase includes research, design, manufacture, Assembly and sale of cars, trucks, parts and
accessories, which are sold under the brand names Chrysler, Dodge, Plymouth and Jeep. The
second comprises, in contrast, operations conducted by Chrysler Financial Corporation and
consolidated subsidiaries, whose main activity consists in financing to customers of the products
distributed by Chrysler. In the late 1990s, the markets in which it operates Chrysler are North
America, Europe, South America and Southeast Asia.
The reasons for the merger in 1998 are mainly related to four factors: geographical
compatibility, complementarity, synergy and complementarity of skills. Tracing and analyzing
each of these factors, it is clear that in the case of geographic compatibility Daimler focuses 63%
of sales in the European market, in contrast, Chrysler that depends to 97% by the American
market; with regard to synergies, looks for both automakers the opportunity to purchase goods
and services on the market of the partner and a consequent use of their distribution chains. The
last two complementary factors consist of the fact that there is a range of complementary
products with the ability to continue to retain its brand, (complementary products), and the





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emphasis placed by Chrysler product development against excessive caution by Daimler in the
skills of engineering nature.
The expected benefits from this partnership were 1,499 million $ the first year and $
3,000 million within 3-5 years after the successful merger; but, after a start with excellent results
on the stock market, the prices of shares in Daimler-Benz rose to a maximum of 108 $, (January
1999), has proposed a crisis proved then real, because Chrysler showed losses to $ 512 million in
the third quarter of 2000. In 2007 Daimler, following the failure of the attempt to integrate two
industrial behemoths so different in history, nationality and image announces the separation and
sale of 80.1% of Chrysler to the private equity fund Cerberus Capital Management, deciding to
keep the remaining 19.9%. The new group name is Chrysler LLC, while Daimler becomes
Daimler AG. The agreement was signed on August 3, 2007, for 5.5 billion euros ($ 7.4 billion
USD)31; After Cerberus appointed Robert Nardelli as Chairman of the Board of Directors and
Chief Executive Officer of the New Chrysler. At the time of purchase of the private equity
fund, Chrysler cars, Chrysler controls Dodge, Jeep, Chrysler Financial, (financial services
company for Chrysler customers), and Mopar, (producer of automobile parts), and Global
Electric Motorcars.
The reasons that led to the failure of the merger between these two automotive Giants
were mainly the following: failure to realize expected synergies because of large differences in
corporate culture, the German management, (especially the CEO Schrempp resigned in 2005)32.
Specifically, Schrempp has overestimated the ability to create value from a partnership with
another company because generally you reward long-term visions rather than short ones, without
being so aware of the many obstacles that arise at the time of the merger. Most importantly, the
necessary condition for a diversification strategy can guarantee good results is the possibility of
having sufficient resources to ensure the maintenance of competitiveness in the area of origin.
What has not happened in the case of Daimler-Benz.


Chrysler Group,;


P a g e | 26

2.3 Cerberus Capital Management33,34,35.

Cerberus Capital Management, L.P. is one of the largest private equity in the United
States. The company is based in New York and was founded in 1960 by financier Steve Feinberg
with William L. Richter. The firm has also affiliate and/or advisory offices in the United States,
Europe and Asia. In 2007, Cerberus with 100 other investors purchased an 80% stake in Chrysler
to 5.520 billion, promising to strengthen the automotive market. In 2008, the plan failed due to
the financial crisis and the subsequent industrial and unprecedented downturn in the automobile
industry in the United States and the subsequent lack of capital. On March 30, 2009 it was
announced that Cerberus Capital Management will give up its share of capital and ownership of
Chrysler as a condition by the Treasury of the United States against the company's rescue.
Cerberus will maintain a stake in Chrysler with Chrysler Financial.





P a g e | 27

2.4 History of Fiat36,37.

Fiat S.p.A, an acronym for Fabbrica Italiana Automobili Torino (English: Italian
Automobile Factory of Turin), is an Italian automobile manufacturer, engine manufacturer,
financial and industrial group based in Turin in the Piedmont region. From February, 1st 2007,
Fiat is a part of FGA, (Fiat Group Automobiles), with other brands as Alfa Romeo, Lancia,
Abarth and Fiat Professional. FGA is a branch of the industrial group Fiat Spa. The company
was founded by a common desire among a dozen aristocrats, landowners, entrepreneurs and
professionals from Turin to set up a factory for manufacturing automobiles. The property owner
Giovanni Agnelli was involved in the act of incorporation in extremis as it was necessary to
replace the share of industrialist Michael Lanza.
The first car built by Fiat has been the model HP 3 , a copy of Welleyes, 8 copies of
this car were built during 1899. It is also important to remember that during that period the name
of the automobile manufacturer is FIA, that name has been changed in FIAT exactly in the 1899.
Fiat actuated the first strategies of diversification during the early XX century regarding
commercial vehicles, tram and sea engines, mostly. Little by little Fiat also starts to expand his
market overseas and in 1908 fund The Fiat Automobile Co in United States, a year later, the
Italian car manufacturer build the establishment of Poughkeepsie. Following this trend in 1908
Fiat introduces in the car market the first car which will be mostly used as a taxi and it will be
called Fiat 1 Fiacre. Several copies of this car will be exported in cities like Paris, London and
even New York. Before World War 1st begins Fiat introduces in the car market new models, (1,
2, 3, 4, 5, 6), those new cars were the first controlled by a battery38.
What is more, Fiat continues to expand in the foreign market opening a new factory in
Russia where produced 2000 pieces of a new car called Fiat Zero. The production of cars for
citizens stopped during the World War 1st when was converted in war use; it restarted on 1919





Wikipedia: Storia della Fiat.

P a g e | 28

with the introduction of a new car called Fiat 501. During that time Fiat also funds Magneti
Marelli following its diversification strategy. Magneti Marelli is an Italian company that
manufactures alternators, car batteries, coils, control, navigation, instrument clusters, electronic
systems, ignition systems, exhaust systems and suspension systems for cars and motorcycles. Its
technology is really specified and high developed that is used by all the most important car
manufacturers of the world thus not only in Europe but even in Asia and United States. Besides
all the biggest F1 teams adopts Magneti Marelli technology on their F1 cars and this brand is
also one of the main sponsors of those teams. Then the introduction of the assembly line is a
clear attempt, by Fiat, to adapt to the production systems of the Ford which was one of the
biggest Fiats rivals in the sector of the car makers.
Fiat uses the assembly line for the production in series for the first time in 1926. Another
important innovation is that of 1928, when Fiat uses aluminum for the construction of the heads
of the engines, (Fiat has been the first in the world on that). After a difficult first period of
development, marked by several recapitalizations and changes in the composition of capital
stock, ownership of the automobile is taken almost entirely by Giovanni Agnelli. He later
became senator during the period of fascism, and will continue to lead the company until the end
of World War II. The decade preceding the outbreak of World War II is characterized by the
fascist autarchic policy, which prevents a development of the company abroad, but that benefits
an expansion of the internal market39; it is in this period that the Fiat 508 Balilla debuts in the car
market and it was presented in 1932, initially equipped with 3-speed gearbox, and later with a
more modern to 4 speed gearbox. But the biggest Fiats success during that time is the more
known Fiat 500 which first version was better known as the nickname Topolino40.
Just after the outbreak of the war it was inaugurated the new plant at Mirafiori, but World
War II leads to a drastic reduction of production of passenger cars with a conversion of lines to
build commercial vehicles required by the war. That also happened to the American group Ford.
The establishments suffer serious damage because of bombings and thus are stopped. Only after
the war stopped, in 1948, thanks to the Marshalls plan the rebuilding period finished and the



P a g e | 29

production of cars restarts at full capacity. Then Agnelli passes the command in Valletta which
leads the Fiat Group on behalf of the Agnellis family, to save one of the few Italian companies
not fully kneeling by the defeat. That happened when Agnelli almost lost the company's property
because of his compromised with the fascist regime.
However Valletta was able to turn around Fiat and year by year the Italian car maker
grows up. For instance in the same year, 1948, Fiat promotes the 1st postwar renewal: the
Topolino 500B, whose innovation compared to the previous one is a change to the distribution
system of the engine. This new engine switches from side valve to the most modern and
efficient OHV gaining more power and speed. What is more, in September of the same year it
was produced in series the first Italian station wagon, which was characterized by the wooden
sides and is better known as Giardiniera. In the years immediately following the Fiat presents
vehicles which can define, unusual for the time, especially for the kind of area where she
operated the company until then. In 1951 is put on the market the Fiat Campagnola 41, a product
based on those made by Jeep, cars belonging to the category off road, used by the US Army
during the war. Fiat orients itself, once again, to a policy of diversification and starts production
of jet, whose first model made in Italy is the G80, introduced in 1951. In 1956 it introduced the
first minivan, the Fiat 600 Multipla. In the 1960s, Fiat is the pivot of the Italian economic
boom, as the largest automobile company in the country.
In 1967 Fiat buys part of Ferrari (with whom he had previously collaborated in the
project of Fiat Dino42) and the whole of spear. In 1969 the first Turin car with front-wheel
drive engine: Fiat 128. In the 1970s, Fiat is facing the first major crisis, linked to oil crisis
context, speakers Cuccia, Chairman of Mediobanca, and the Managing Director Cesare Romiti to
face the situation. Despite the difficulties caused by the crisis, in 1979, the company undergoes a
radical structural change with the establishment of Fiat Auto S.p.A.: the industrial holding.
Below Fiat Auto S.p.A. are grouped all companies active in the automotive industry: Fiat,
Lancia, Autobianchi, Ferrari and Abarth, splitting up so all collateral activities into new social
reasons, as Fiat Ferroviaria, Fiat Avio and Fiat Trattori. The production of commercial vehicles



Storia e direzione aziendale Fiat,

P a g e | 30

takes the name of Fiat to be incorporated into the Iveco brand. By the early 1980s, Fiat gives
birth to one of his greatest achievements ever made: the Fiat Uno (designed by Giugiaro), dated
1983, first House car whose engine is produced in Termoli and is to date the Fiat model that
boasts the greatest number of aircraft built, over 8.000.00043.
In 1985 the first model through the collaboration and using the same mechanics: the Fiat
presents at the same time Croma, (design by Giugiaro), Lancia Thema and Alfa Romeo 164,
(designed by Pininfarina). The 1990s are characterized by a production of cars very similar to
those that circulate today. With the second great crisis Fiat suffers a fall of 20% of sales,
explosion of debts, and also in this occasion, as in the recent past, it is necessary the intervention
of Enrico Cuccia.

2.5 The strange alliance Fiat / GM44,45,46.

In March 13th 2000 General Motors and Fiat signed an alliance that foresees the
establishment of two joint ventures related to the European activities of two manufacturers
within the motor powered and purchases. The two companies have agreed a stock exchange
amounted to 2.4 billion dollars, accounting for 20 percent of Fiat Auto S.p.A. and at 5.1% of
General Motors. Fiat S.p.A. subscribed shares of newly-issued free with a capital increase
reserved. Having created an ad hoc holding company governed by Netherlands law, the Fiat
Auto Holding B.V., based in Amsterdam, the GM, with the liquids obtained from Fiat,
subscribed to the capital increase with surcharge of the Dutch holding company.
Prior to the establishment of the holding company, Fiat has proceeded to divide the old
Fiat Auto S.p.A Company into two branches: the Fiat Auto Holdings, renamed Fiat Holding

Storia e direzione aziendale Fiat,;





P a g e | 31

B.V., and Fiat Auto Manufacturers, then become Fiat Auto S.p.A., whose entire packet went
from Fiat Auto Holdings to Fiat Holding B.V. The dilution of the earnings per share was
prevented by GM with a buy back (repurchase of own shares), which has increased the weight of
Fiat in GM from 5.1% to 5.6%. Under the agreement, Fiat could not modify its share of 80% for
the first year of validity of the agreement, while GM will not change its 20% for nine years.
According to the so-called Master Agreement Fiat may, only after one year from the end of the
transaction and before the ninth, sell everything and only its 80% of Fiat Auto Holdings, which
includes the 100% of Fiat Auto, by clicking the right of first offer in favor of Detroit, that
within 20 days could accept the price and conditions or lower bid. In this case the parties should
commit to negotiate for ten days exclusively and in good faith to agree.
Fiat has a put option whereby GM would be forced to buy the remaining 80 percent.
Therefore, it is necessary that Fiat ask GM to determine the fair market value of such share of
F.A. Holding. If Fiat accepts the assessment made by the partner, in a maximum time of ten
days, release the purchase obligation. The right of this option is exercisable twice, in the period
from 42 months, (January 2004), at the ninth year of the effectiveness of the Master
Agreement47. In case of actual sale, the payment, if required, could be done with shares owned
by GM, (in whole or in part), provided that the Detroit House accepts. In any case, Fiat, even
with cash payment may go up to maximum 10% stake in GM. The resolution of the Master
Agreement signed in 2000 ends after only 5 years, (prior to the expiration time of nine years).
In fact, the American found himself having to pay $ 1.55 billion, thus quantifying in monetary
terms the much discussed put option, i.e. the right exercisable by Fiat to sell the entire auto sector
to GM; the joint ventures are dissolved, GM got back the 10% of Fiat Auto Holdings, plus the
ability to continue to use diesel Fiat technologies and acquires 50% of Polish plant Bielsko Bialia
where most modern engines are produced the 1.3 Multijet. The reasons that have prompted the
two carmakers to seek an agreement can be traced to the following factors:

The automotive crisis;

The unfavorable international economic situation;

The possibility to restore the auto industry through a strategic agreement


P a g e | 32

Figure 1. Shares under the agreement signed between GM and Fiat. Source:

Finally, the end of the alliance between these two big car makers has been a good and
necessary step for both and above all for Fiat. In fact Fiat shares continues to rise: the ordinary
share rooms of 4.36% to 6.19 share between dizzying exchanges for 80 million units, accounting
for 10% of the share capital of category. Good intonation even for the privilege (5.32 percent to
4.64) and savings (9.08% to 5.12). No impact on Fiats rating (BB-/Negative/B) as a result of a
divorce between Turin and Detroit.
For the rating agency Standard Poors, the understanding reached between the two groups
has positives and negatives that balance. On the one hand, the Italian automaker will qualify for a
providential and substantial cash injection that will improve the Groups financial flexibility,
at a time when Fiat is generating a negative cash flow and still has major debts. On the other
hand, Fiat loses the opportunity to dispose of cars, an industry that has experienced significant
losses over the past four years and is expected to break even until at least 2006. As for GM, the
Agency confirms the judgment on rating (BBB-/Stable/A-3) and outlook.

P a g e | 33

2.6 2004: a particular year for Fiat48,49.

In 2004 there are a number of very important events for the company: Umberto Agnelli
dies and the post of President is covered by Luca Cordero di Montezemolo who was already
present in the Board of Directors of the Company, Marchionne became CEO of Fiat S.p.A. and
Fiat Auto, replacing Boschetti. Marchionne is the turning point for the Turin-based automaker,
which after many years finds itself in balance. To the relevance that takes this character within
the company, and especially for the decisive role it will have for the purposes of signature of the
agreement with the American automaker Chrysler, will be highlighted below are some of the
most important innovations into corporate and field management introduced by the new CEO
of Fiat. But, why Marchionne is so important? Lets see it.
Marchionne has operated on the following fronts:

Divorce from General Motors;

Negotiation with banks.



Research and development of new products;

Organizational structure.

Main objectives from the organizational point of view:



49 Storia della Fiat.

P a g e | 34

Refocusing: greater liquidity for the revitalization of the core-business, politics of

divestment has arrived at the sale of approximately $ 9 billion of assets.

Streamlining: streamlining processes that allow to measure effectively the

manager and their results.

Cultural Change:



Responsibility and motivation.

In 2006 14 new models are launched, including Fiat, Lancia and Alfa Romeo. Are
intensified relations with Asian partners in India, China and Russia, we can say that matures the
implementation by Marchionne based on market introduction of new models, organizational
change, targeted focus, agreements and Fiat back to profit50.

50 Storia della Fiat.

P a g e | 35

2.7 Sergio Marchionne51,52.

Sergio Marchionne was born in Chieti the June 17, 1952. He holds three degrees in Law
at Osgood Hall Law School of York University, a Master in Business Administration (MBA)
from the University of Windsor and a masters degree in philosophy from the University of
Toronto. Place the first part of his professional activity in North America as Manager. From
1983 to 1985 he worked for Deloitte Touch as its accountant tax specialist; from 1985 to 1988
he served as group controller and then Director of corporate development at the Lawson Mardon
Group in Toronto. From 1989 to 1990 he was appointed executive vice President of Glenex
From 1990 to 1992 he is responsible for the finance area and Acklands head for legal and
corporate development at the Lawson Group, acquired in the meantime by Alusuisse Lonza
(Algroup). At the headquarters in Zurich, he plays roles of increasing responsibility until
becoming the CEO. Sergio Marchionne later guide the Lonza Group departed from Algroup,
until 2002, when he was appointed Managing Director of SGS Group of Geneva, a world leader
in inspection, verification and certification; the group is backed by 46 thousand employees
worldwide. Thanks to the excellent management of the Swiss group cleaned up within two years,
the name Sergio Marchionne acquires shine in international economic and financial
environments. Starting in 2003, on appointment of Umberto Agnelli, Mackay joined the Board of
Directors of Fiat Lingotto. Due to the death of Umberto Agnelli and the resignation of Chief
Executive Giuseppe Morchio, Sergio Marchionne was appointed, (June 1, 2004), CEO of the Fiat
group. After some disputes with the German Manager Herbert Demel, in 2005 also assumes the
leadership of Fiat Auto firsthand. Marchionne was appointed President of the European
Automobile Manufacturers Association, (ACEA), in 2006.
Along with Luca Cordero di Montezemolo, is considered to be the author of the
Rehabilitation Division of Fiat. During his administration, Fiat must tackle projects that had been



P a g e | 36

previously discarded: Fiat 500, Lancia Fulvia Coupe, Fiat Croma and are produced in just two
years, many new models53. In the period of global international crisis, in April 2009 Marchionne
makes long and difficult negotiations relating to the acquisition of the American Chrysler with
the unions and the American Government.
At the end of the negotiations reached an agreement providing for the acquisition by Fiat
of 20% of Chrysler shares, in exchange for know-how and technology from the Italian
automaker, thus giving birth to the sixth Automotive Group in the world. The agreement is so
important that the President of the United States Barack Obama to give ad. In the days
immediately following the agreement with the automaker from overseas, the CEO of Fiat Group
begins negotiations with the trade unions and the German Government for a merger between the
automaker and Germanys Opel, Piedmont, (part of the US Group General Motors): the aim is to
give life to an automotive giant capable of producing 6 million cars a year.


P a g e | 37

Chapter 3

The deal between Fiat and

Chrysler. Steps.

P a g e | 38

3.1 The deal.

At the end of the first 2000s decade the global crisis was getting worst and worst. Above
all the automotive car sector was suffering considerably more than 1990s in terms of sales. As a
result, the crisis involved the world entire from USA to Europe where the most important car
manufacturers were suffering losses and some of them were even close to the bankruptcy. In
2009, two automakers in particular showed serious signs of crisis, Fiat in Europe and Chrysler in
The economic crisis will lead to a high concentration in the automotive market, so that
among the mass manufacturers might even survive only six54, (Sergio Marchionne, CEO of
These are the words that CEO of Fiat pronounced at the end of 2008, almost as to predict
the Alliance that will be signed later with the smallest of the big three American carmakers,
the Chrysler. In a period of crisis like the one that is going through the world economy over the
past two years, also the automotive industry could be radically changed, with greater
consolidation as a financial and economic crisis that affects everyone, and that motivates
companies to ally, to continue to survive. The January 20, 2009, twenty years after the first
contacts between Gianni Agnelli and Lee Iacocca, the newspapers reported the news about a
possible preliminary, non-binding agreement that gave life to a strategic alliance between Fiat
and Chrysler. Pursuant to the conclusion of an alliance with Daimler Benz (who held the 19.9%)
Chrysler was 80.1% owned by the Private Equity Fund Cerberus Capital Management55.
At the time it was a simply agreement, in fact, the contract would be signed in April after
Chrysler was able to obtain from US Treasury approval of the recovery plan. Fiat could thus get
a stake of Chrysler and, moreover, could have had access to the American market through the
distribution channels of the American automaker. Chrysler, on the other hand, could have had
access to Fiat's technology to produce smaller cars and with less polluting. Since Chrysler was in


Dicembre 2008, Il Sole 24 ore;

P a g e | 39

serious difficulties financing, could pay the Fiat shares allowing Fiat to become his partner free
of charge. The first draft of the agreement provided for the Fiat purchasing a participation fee of
35% of Chrysler, with the option to get 55%56 and check the American society57.
If Washington was able to recapitalize Chrysler, soldering the private shareholders, the
share and option would have lapsed. In case of failure of Chrysler, Fiat would not progress no
risk because the agreement does not included any kind of payment. In the case of revival of
Chrysler, on the other hand, the Italian automaker would become entitled to a logistics
infrastructure in terms of distribution and factories overseas, underutilized and at low cost. From
the viewpoint of Fiat, the logic of the agreement with Chrysler, is to use assets already available
and that they can offer to the company development opportunities on new markets; from the
point of view of the American Group, open new scenarios towards new technologies and
transmissions for a wider range of products and the introduction of new, energy-efficient small
cars, to meet the needs expressed by the President of the United States Barack Obama about the
However, it is necessary to point out that the agreement with Chrysler would not solve
the short-term problems of Fiat that between late 2008 and early 2009 saw a decrease in sales
equal to 60%, a growing need for cash and the crisis of financial systems that worsen the
situation if necessary. And it is for this reason that at the beginning of talks between the two
houses in many were skeptical about the true success of the deal, both for Chrysler that was on
the verge of bankruptcy and Fiat that suffered from a major crisis in terms of profits and sales.
On the other hand, from the viewpoint of Chrysler the situation is totally different.
The Alliance with the German company Daimler, which paid $ 36 billion for 100% of the
American group that retained a 19.9% devalued to zero, it has been a bad investment for the
private equity fund Cerberus, which bought the 80.1% of the American group. Chrysler risked
failure, putting in serious difficulties the automotive sector which the States had already the
crisis because of General Motors58. In addition, the alliance between Fiat and Chrysler could help

Fiat-Chrysler: option for 55% (WSJ) Wall Street Journal;


January 2009, Il Sole 24 ore;


P a g e | 40

the American group to obtain loans more easily from the U.S. Government; in fact, Chrysler had
already received federal loans amounting to $ 4 billion to avoid bankruptcy, and by the end of
March 2009 was supposed to demonstrate that they are able to survive in order to get further
government aid 3 billions of dollars that were needed. In case of success of the agreement, the
Pact between the two car groups would beat and compete against larger and more global rivals as
Toyota, Volkswagen, and to counteract the possible alliance between Renault and Nissan.
According to initial rumors leaked and announced by U.S. newspapers such as Financial
Times and Wall Street Journal, Fiat and Chrysler would form a joint venture, Fiat would help to
finance the restructuring of Chrysler factories for the production of Fiat components and models
and would give American carmaker access to its technology, without injecting cash into
Chrysler; Fiat would benefit not only in assembly plants and Chrysler engines, but also by its
extensive dealer network; in fact by the alliance could build and sell Fiat and Alfa Romeo cars in
the USA. Chrysler could expand its product line with small and efficient cars and reduce its
dependence on the North American market.
Here is some evidence of people involved in the deal:
Sergio Marchionne, CEO of Fiat: the initiative represents a milestone in the rapidly
changing scenario of the automotive sector and confirms the commitment and determination of
Fiat and Chrysler to continue to play a significant role in the overall process59.
Bob Nardelli, president and CEO of the smallest of the big three: is an ideal
combination because it creates the potential for a new and strong competitor globally, giving
Chrysler strategic numerous benefits including access to products that complement our current
product portfolio; a distribution network outside North America and cost savings of design,
engineering, purchasing, sales and marketing 60.
Luca Cordero di Montezemolo, chairman of Fiat in 2009: from the point of view of Fiat
means being able to sell technologies cost major investment and access to markets with great


January 2009, Il Sole 24 ore;


January 2009, Il Sole 24 ore.

P a g e | 41

potential for us, by reintroducing in the American market brands such as Alfa Romeo and Fiat

The company led by Bob Nardelli was the smallest of the big three and has slipped to
fifth place in the U.S. market, preceded by Toyota and Honda62. At the time was in a serious
financial crisis and in 2008 was one that has suffered more than the U.S. recession, with a
decrease in sales of 30 percent on an annual basis. If Chrysler had not received the 4 billion
dollars from Washington in early 2009, was supposed to start bankruptcy practices. Until Fiat
had not started to invest in American Group, the burden to restore Chrysler would have still been
the U.S. Government; the agreement with Fiat represented an important part of the recovery plan
of the American group.
The Alliance of the two automakers was a means for Chrysler to prove to Washington
that it has a partner, platforms and engines cheaper and suited to market economy of the period.
In order for the agreement to become binding was required further disbursement by the U.S.
Government for 3 billion, because the American Group could not yet be declared out of danger
and the Alliance did not any kind of disbursement by the Italian partner. To get this aid, Chrysler
would have to prepare a recovery plan, which was to be submitted to the Treasury Department
by February 17th, 200963.
In this recovery plan were outlined the means and instruments with which Chrysler would
return to profitability; everything placed the carmaker in an awkward position with regard to
American taxpayers, to whom it was requested a further outlay when, nor the majority
shareholder Cerberus, nor the future Allied Fiat, did the same thing. Fiat, while not making any

P a g e | 42

financial outlay in case of collapse of Chrysler, could lose the money invested in revitalizing the
production in America and the time and energy necessary to keep its Italian business. Then the
deal seemed close to the sign, so much that the CEO of Fiat, Sergio Marchionne visited the
headquarters of Chryslers Auburn Hills, Michigan, to know the details of the recovery plan, and
to give a look at cars in production, in which Chrysler was trying to save on components to be
assembled and cut margins for resellers; This is because the Treasury loan required to save in
every way.
Although many have expressed negatively regarding this possible alliance with Fiat,
Chrysler worked to define the lines of future product plan: seven models in particular, including
four with Chrysler brand and three Fiat-branded or Alfa Romeo, (acquired in 1986 by Fiat),
which were supposed to be produced in Chrysler in North America and sold through Chrysler
dealerships, Dodge and Jeep. With regard to the exchange of know-how and technologies
provided for in the agreement, it would produce in us a new vehicle, built using the Fiat C-Evo
platform that would replace the Dodge Caliber, and, on the same platform could be built, the
successor to the Alfa Romeo 147, also destined for the American market.
According to a survey by UBS and Boston Consulting64, European managers predicted
industry consolidation driven by the crisis across the global economic system; in this regard, one
can speak of transformational deal, where this term refers to the fusion that modify the
scenario of an entire industry. Sectors touched by transformational deal are mainly those of the
insurance, banking, technology and construction. The research conducted by Boston Consulting
and UBS also provides a selection of those factors that play a key role in the success of M&A. In
first place, with a rate of 80%, we have strategic convenience, while the economic characteristics
have a rate of 49%, lower than the chart there are the cultural convergences at 35%; after that the
speed of interceptions to 34%, industrial and business skills at 33% and, finally, the last factor
represented by high synergies with a share of 26%. Here below is the chart that better clarify
what we just said, (source: UBS/BCG M&A survey).


P a g e | 43

Figure 2. Key factors of success of M&A. Source: UBS/BCG M&A Survey.

In few words looking at a process of an Acquisition it is important do not remain limited

only to indebtedness and profitability but we must also look at the capacity and speed of
interacting new business, achieve synergies and cut costs; just as important is the ability to
leverage the same sales and distribution networks. That is the mirror of the situation of Fiat and
Chrysler. Both automakers, in fact, seemed determined to forge an agreement to achieve
synergies with a certain complementarity of products and technology that would allow the
American group to develop new products and meet new federal requirements imposed by
efficient Government, Obama would allow Fiat to enter the American market through the use of
the logistics network which included distribution and sale of Chrysler.
The successful conclusion of the agreement was subject to other issues, such as, for
example, depend on concessions that Chrysler would be able to get American distributors,
suppliers, banks, bondholders and unions. The American Group, already in early February 2009,
began negotiating with the United Auto Workers (UAW), American Workers Union in the
automotive industry by informing the suppliers the need to decrease prices. One of the key

P a g e | 44

persons to the final decision on the bailout65 of the American automotive industry was the
President of the U.S. Chamber, who declared to the press, a few days before the deadline for
Chrysler to present its restructuring plan and have an open attitude towards negotiations close
connection between Fiat and Chrysler.
However, at the same time, the President of the U.S. Chamber expressed strong doubts as
to whether to grant another loan to Chrysler, as it was believed that was a way of promoting a
financial company, (Cerberus Capital Management), who was asking to be saved after making a
bad investment. In this regard the latter, could be the one to benefit directly from American
taxpayers aid. In particular for Chrysler, which unlike the other companies was (at the time)
owned by a holding company rather than shareholders, the granting of new aid would not be
The U.S. Government had already given a loan to GM of 13.4 billion dollars which,
however, needed another 9.4 billion to avoid bankruptcy66; to Chrysler were given 4 billion in
advance on a package of 7 billion but in order to survive and sign the agreement with Fiat was
necessary an additional sum of 3 billion. The rescue of the auto industry, as the banking sector is
one of the three pillars of anti-crisis system put in place by the Obama Government; If Chrysler
had not been able to receive aid, would have failed, causing the loss of one million jobs that
would have resulted in much higher costs, in terms of unemployment benefits and health care, in
relation to the aid required by the automotive group to the Government, in order to survive.


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Before to continue to analyze the deal more deeply it is important to look at two
fundamental steps which characterized the final agreement between Fiat and Chrysler:

The recovery plan of Chrysler;

The U.S. Bankruptcy Procedure through the Chapter 11;

The union agreement.

3.2 The recovery plan of Chrysler67.

On 17th February 2009 Chrysler gave to the Administration the plan related to the
ongoing restructuring program of the company, in accordance with the commitments made at the
time of granting the financing of 4.5 billion given the October 2008 by the Bush
administration68. The automotive group, required in addition to the 3 billion provided by the
package of 7 billion, of which 4 were already anticipated a further loan of 2 billions of dollars
justified from a contraction of sales of 30% year on year in 2008. The complete plan was
presented at the end of March 2009, but at that precise moment, had already been presented cuts
to estimated costs for 700 million dollars of staff, models, and in addition, disposal of other
assets worth 300 million. In the revitalization plan was confirmed the strategic alliance with Fiat,
which thus allowed Chrysler to have access to new technologies for the production of ecofriendly cars. Besides, Chrysler claimed to want to launch on the market, over the next four
years, 21 new models69.
The recovery plan of Chrysler has been really important to sign the final agreement
between the two car makers. A regulated restructuring outside of bankruptcy and reaching an
independent sustainability, strengthened by the strategic alliance with Fiat, represented the best
option for Chrysler employees, unions, suppliers, customers and certainly for taxpayers. The



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problem was to convince the adverse parties to the agreement, that this represented an enormous
benefit, for both partners. Many members of the U.S. Congress believed instead that the Alliance
with Chrysler would bring advantages exclusively to Fiat, which could benefit from State aid.
The Alliance not only would allow Chrysler to strengthen its financial soundness, but would give
an important contribution to save jobs in the United States and could be a key factor in the
production of fuel-efficient cars that could allow a quick repayment of public funds made
available by the Obama Administration. The U.S. Administration was confident that Chrysler
would not work as an independent company in that particular situation and, if the deal with Fiat
was not concluded within the period prescribed, which were scheduled for April 30, 2009, the
American Group would not receive additional funding and would be left to complete the

3.3 The U.S. Bankruptcy Procedure through the

Chapter 1170,71.

In the United States, the bankruptcy law is regulated by the Bankruptcy Code, enacted by
Congress and is contained in Section 11 of the United States Code. The United States of America
is the only country in the world to have established judicial courts specialized in bankruptcy:
Bankruptcy Courts. In judicial courts 90 distributed throughout the U.S. were established by
Congress of the bankruptcy courts, each of which is chaired by a bankruptcy judge. The primary
objectives being pursued by the American bankruptcy rules are essentially those of:

Grant the honest debtor a chance to start over, lifting up by most of his debts;

Allow lenders to repossess what their supposed to fairly and in accordance with

the concrete possibilities available to the debtor;


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Reorganize an economic activity through debt restructuring or undertaking or,

alternatively, provide a framework for reference for the orderly liquidation of the bankrupt

Prevent and/or remedy for fraudulent actions carried out by lenders and/or

borrowers and not falling in the objectives pursued by the bankruptcy laws.
For the purposes of what we just said, it is important to analyze the particular form of
insolvency procedure governed by the famous Chapter 11: the Reorganization.
The Reorganization in most cases initiated voluntarily by the debtor, which should not
necessarily demonstrate the State of insolvency, but just showing that you have debts that
combine to create financial problems. In the rare cases where creditors initiate the procedure,
they must prove not to have been repaid by the debtor at the maturity.
The bankruptcy court allows the enterprise to the Reorganization if deemed able to
overcome the crisis without causing prejudice to creditors; the defendant admitted can continue
to manage the company in the interests of the creditors, it is envisaged, however, that in the event
of mismanagement, the creditors Committee formed after the commencement of the insolvency
proceedings, the Court may require the appointment of a trustee in bankruptcy who supports and
controls the actions of administrators. Over the next 120 days from the opening of the
proceedings, the debtor shall prepare the distribution scheme liabilities which may also include
management actions, such as a merger or the sale of a company branch or the entire enterprise;
In addition, the debtor must make a statement that explains the causes and explains the steps to
overcome it72.
The bankruptcy judge is obliged to conclude as soon as insolvency proceedings, generally
within a year, but there may be cases where everything will be resolved within 120 days or one
month. From the perspective of American entrepreneur, reorganizing governed by Chapter 11 of
the United States Code, represents a strategic choice for dealing with a situation of financial
instability before encountering the real state of insolvency.


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3.4 The union agreement73,74,75.

To help to reorganize Chrysler and to encourage the Alliance with Fiat, the Union would
accept drastic cost cuts and changes to the contract of employment. Whereas both American and
Canadian unions accepted a reduction in wages, annual total savings amounted to 240 million
Canadian dollars equivalent to 198 million United States dollars; the Canadian Auto Workers
drew up a 20% decrease in wage equal to 19 Canadian dollars, which is equivalent to 16 United
States dollars, through waiver by workers in a series of benefit. The Pact also contained a cut of
50% of the cash contribution from 10 billion that Chrysler had to pour into a special health care
Fund for retirees run by UAW called VEBA (Voluntary Employee Benefit Association), which
offered only 4.59 billion dollars in the form of debt securities; Chrysler also undertook to pay
cash for 300 million dollars in 2010 and in 2011, with higher rates in subsequent years up to 823
million dollars between 2019 and 2023. The Fund would have received a significant amount of
shares and the holders would be able to appoint a representative on the Board of Directors of the
company restructured. It seems clear that the goal was to bring wages and benefits that are close
to those of non-unionized U.S. plants of international competitors, starting with the Japanese
The pact with Fiat, which would lead to the Group technologies worth 8 billion, would
have also created 4000 unionized jobs in the United States. Chryslers smaller lenders, more
aggressive ones, did not want to join, either at the conclusion of an alliance with the Italian
partner, the agreement reached with the banks that represent the major creditors of the American
Group, because to them, JP Morgan, Goldman Sachs, Morgan Stanley and Citigroup, is part of
the 70 percent of Chryslers debt76. Financial intermediaries had reached an agreement with



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Chrysler that their claims for refunds have come down to two billion dollars; the remaining 30
percent of the debt was represented by about 40 hedge funds that preferred to not associate with
other creditors in the hope of arriving at an agreement more advantageous for them.
The hedge funds are important to understand why Chrysler went to bankruptcy. Hedge
funds are a special type of mutual fund. According to this is the definition of
hedge funds:
An aggressively managed portfolio of investments that uses advanced investment
strategies such as leveraged, long, short and derivative positions in both domestic and
international markets with the goal of generating high returns (either in an absolute sense or
over a specified market benchmark)77.
Again: Legally, hedge funds are most often set up as private investment partnerships that
are open to a limited number of investors and require a very large initial minimum investment.
Investments in hedge funds are illiquid as they often require investors keep their money in the
fund for at least one year78.
Thanks to the process of transformation that is to issue shares in small cuts and to
purchase large blocks of securities, mutual fund can take advantage of quantity discounts on
trading commissions and buy portfolios of securities. Hedge funds gather money from many
people and invest on their behalf, differentiating them from traditional mutual funds for some
features, such as in the United States.
The minimum investment is between 100,000 and 20 million dollars (formulas of limited
partnership), besides, hedge funds, to ensure a long-term financial soundness, require that
investors use their capital for long periods of time, often several years. Opposition from hedge
funds to reduce its claim against the company brought Chrysler to go into receivership. This is
why the American automotive group has resorted to a surgical bankruptcy (also called driven
bankruptcy), which lasted between 30 and 60 days79.

77, the hedge funds;

78, the hedge funds;


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After speaking in general terms of the two carmakers and the negotiation between Fiat
and Chrysler, we can get more detail within the question and analyze closely what represents the
final agreement signed between the two groups on April 30, 2009. As we will see, though, is a
type of agreement which foresees several steps. Let us talk about these steps mentioning
percentages, amounts and numbers of the deal and also analyzing the business valuation and
what are the reasons behind this agreement from the very beginning till nowadays.

3.5 Business valuation80,81.

The agreement between Fiat and Chrysler was made officially on January 20, 2009. It
was a non-binding letter of intent for the establishment of a global strategic alliance. The
contract itself was signed 4 months later, on April 30, 2009, when Chrysler got from Treasury
approval of the recovery plan. This condition was essential from the success of the agreement.
It is important to underline that Chrysler contracted 70% of debts and U.S. government
declared the Bankruptcy protection, (Chapter 11 as is called in U.S.). Chapter 11 protects firms
from their creditors, allowing them to rearrange their finances while still trading as we already
said. The filing for bankruptcy protection will lead to the forming of a new corporate entity. The
details of the deal are:
Italys fiat will not have to pay anything for its share, which will give it access to the
North American marketplace.
Fiat took a 20% stake, with the possibility of it rising to 35% if performance targets were
met. It could reach 51% by 2016 if Chryslers government loans are fully repaid.



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The Treasury had an 8% stake, a union-run trust fund VEBA took a 55% stake, and the
governments of Canada and Ontario gained a combined 2% stake.
At the moment of the agreement Chrysler had already received 4 USD billion and 3.7
were arriving. Chrysler had to repay this loan within 8 years Fiat had not to pay any USD or
Euro for the debts of Chrysler which were estimated in 70%.
Fiat Group has the option to purchase up to an additional 16% (exercisable from 1st
January 2013 to 30th June 2016). The purchase price has to be determined using a pre-established
market-based formula. This option may not be exercised until total loans outstanding from the
US Treasury and the Canadian government fall below 3 USD billion.
Chrysler bondholders had to receive 2 USD billion (1.35 GBP billion) in cash in
exchange for forgiving their 6.9 USD billion debt.
The new company is running by a nine-person board, with six picked by the government
and three by Fiat. The board had picked a new Chief Executive.
Italys Fiat has free access to the financial statement of Chrysler and also three persons in
the government of the new company. No Chrysler plants in the US closed.
President Obama said: necessary steps had been taken to give Chrysler a new lease
on life. He added that he had every hope that Chrysler will become stronger and more
competitive now that it had Fiat on board. It's a partnership that will give Chrysler a chance
not only to survive, but to thrive in a global auto industry, (Barack Obamas speech about Fiat
and Chrysler agreement)82. However, the deal needed to be ratified by the bankruptcy court.
While Chrysler's main banks, holding 70% of the debt, accepted this proposal, it was rejected by
hedge funds that hold a sizeable proportion of its remaining debt. While our agreement must
necessarily go through the US legal system for a few weeks, we will be preparing ourselves to reemerge quickly as a reliable and competitive automaker as Marchionne said, (CEO of Fiat)83.
The Treasury will provide Chrysler with $ 3.3 billion in working capital to support it through the
Chapter 11 process. It will also extend a $ 4.7 billion loan to the new company, once it has



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emerged from bankruptcy, repayable over the next eight years 84. The partnership with Fiat will
create the worlds sixth largest carmaker.
The logic of the agreement with Chrysler in the prospect of Fiat is to use assets already
available and that the company can offer development opportunities in new markets. And, as it
has been already said, Fiat will not spend any amount of money. Whereas, from the side of the
American group opens its doors to new technologies and programs to expand the range of
products and the introduction of new energy-efficient small cars. The pact between the two
automakers would fly together and compete against larger rivals and more global as Toyota,
Volkswagen, and also to counter the possible alliance between Renault and Nissan.

3.6 Main reasons behind the deal.

Fiat and Chrysler were ready to sign the Covenant by April 2009, Alliance that was
established without forking out just one hundredth of a euro or dollar. As we have seen, this is
what provided the letter of intent between Fiat, Chrysler and Cerberus, the private fund
investment that in August 2007 has detected 80.1% of the American group from Daimler, which,
until 2009, held the remaining 19.9% stake85. In short, the letter said Fiat would provide to
Chrysler technologies, components and managerial support for the platforms of fuel-efficient
cars are defined, which included those of Panda-500, Grande Punto (or even old Punto, which at
the time was still in production) and Bravo with all their engines, including the new multiair 4cylinder at 2 and equipped with direct injection, with or without a turbocharger and Diesel 4
cylinders. In return, Chrysler would give Fiat a 35% of its own shares and access to its
distribution network, in practice the possibility for the Italian automaker to sell cars in North
America through a trade organization established and branching.



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It seemed a perfect agreement because the ranges of the two car automakers were not
overlapping but meshed perfectly vertically. Fiat back into a market that was abandoned in the
mid 90s, but which at the time offered enormous prospects of integration at level of the
industrial product and at political and financial level. For the product, the Italian automaker
planned to ask Chrysler rear wheel drive platform for the flagship Alfa Romeo that is the new
Phoenix V6 whose production would have begun at the end of 2009. At the same time, Fiat
thought to exploit certain supply agreements already finalized regarding axles and gearboxes,
besides all the work that had been done for the electric car, including the crucial part that
concerns the batteries which had involved the A123, American company that is controlled by
corporate giants such as General Electric, MIT, Motorola, Procter and Gamble Qualcomm &. In
terms of electrification, Fiat was far behind compared to other manufacturers.
From the industrial viewpoint, Chrysler had an Assembly point in Europe represented
by Magna Steyr that assembling in Graz, Austria, some of his models through an agreement that
was completed in 2010. At the end of the contract, Fiat factories have resumed this charge and
the place was precisely Italy, since this country was, and still is for the Chrysler Group, the
second largest market in the world after America. This is how the American carmaker depend on
the internal market and how weak in foreign ones. In addition, the agreement expires in 2012 for
the supply of Diesel 2 liters by Volkswagen and the Fiats common rail would be very
convenient for crossover Dodge Caliber and Jeep Compass and Patriot products with a pallet
source Mitsubishi Outlander, the same used by Peugeot and Citroen to the 4008 and the CCrosser. On the other hand, Fiat could exploit establishments, while largely underused by
Chrysler, producing directly for NAFTA markets (USA, Canada and Mexico) in fact UAW
(United Auto Workers), the American Engineering Association, was absolutely favorable to the
Fiat would also integrated its productive machine on the continent, which was all
concentrated in South America and which was joined, shortly before its implantation in Brazil,
where Chrysler with the joint-venture with BMW (agreement established in 1996, before the
entrance of Daimler), produced between 2001 and 2007 the 4-cylinders Tritec86 for PT Cruiser
and MINI series. Ceased the production MINI, Chrysler was producing the 4 cylinders (1.8, 2

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and 2.4 liters) with the joint-venture GEMA (Global Engine Manufacturing Alliance) together
with Hyundai and Daimler. Fiat was keen to produce in America 4-cylinder 1.4-1.6 liters petrol
and flex-fuel, just what was missing at Chrysler, especially in view of a compact car to be sold
on the American market. An Alliance of builders, who reached in 2009 a critical mass of 4
million units per year, was also a competitive advantage for cost reduction; furthermore, the
possibility of using strong currencies like Euro and dollar reduced the dangers arising from
currency fluctuations for the purchase of components and raw materials.
Looking at the situation from the Chrysler side, the plan was an important strategy
towards the American Government to prove that 7 billion dollars granted (4 already obtained,
while 3 were in the home stretch of arrival) were invested in a company whose prospects were of
survival and development with the arrival of a partner whose management gave many security
guarantees. From a financial point of view, the benefits would be greater for Fiat because
acquires an asset at no cost. This meant not having to resort to shareholders to recapitalize and
to demonstrate that their asset productive, technological and managerial had a value and then
invoke the investors on their title to do this climb, thing that was happening and that Fiat was in
need. In this way were solved some major short-term problems concerning the two automotive
groups, but did not give guarantees about what might happen in the future.
Looking at other alliances of the two automotive groups should be noted that:
Fiat had long since signed various agreements which had not achieved the desired
success, indeed, failed all. In India, once signed the agreement with Tata, the relevant aspect was
the entry of Ratan Tata on the Board, but two years was not enough to define product
developments and commercial developments87 relevant to both that, too, would have been
possible because in Indian portfolio entering Meanwhile Jaguar and Land Rover (to which Fiat
Financial Services provided financial products from 2008).
In China, after the failure of the joint-venture with Shanghai Automotive, Fiat seemed to
agree with Chery, but never did anything and so the CEO of Fiat would turn his attention to
Guangzhou Automotive Industry Group (GAIG), partner of Honda and Toyota in China. In
short, Fiat Asian markets showed a blatant late and in China sold tens of thousands of cars while
other manufacturers were selling more than one million. In 2009 there was talk of agreements

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with BMW, with respect to small cars, but since that BMW had between Daimler shareholders, it
seemed very unlikely even if the two German rivals seemed to agree to create a new platform for
the low range. In any case, Fiat would remain excluded from the agreement.
Even Chrysler had tried to reach an agreement with Chery to build a small car, and had an
agreement with Nissan to provide the platform B of the Micra and motors for a global model. It
was therefore important to understand if this deal could still be valid considering the likely
Alliance with Fiat that could offer the same things and towards which the obligations were
absolutely more. It was not the first time that Fiat and Chrysler were teaming together with
partners from the other side of the Atlantic. Daimler wanted to leave as soon as possible its share
of 19.9 % and for this purpose it began a legal battle with Cerberus.
Fiat, meanwhile, had moved with General Motors, which had managed to take away
precious money for not having exercised the option to purchase them but left a valuable package
represented by Diesel. It seems so easy to guess that American and European automakers can
hardly cooperate productively and for a long time. It was therefore wondering if Chrysler could
be a good partner for Fiat since the American carmaker had not been for a group of automotive,
financial strength and technological image as Daimler. And besides, why Fiat should feel
satisfied by this strategic alliance if it had not been the case with GM?
Another negative example is represented by Talbot, Chrysler Europe 88, purchased by
Peugeot in 1978 which did nothing to prevent the brand disappeared. Also for Peugeot in 2009
there were rumors about an alliance with Fiat. Between Fiat and Peugeot are now consolidated
reports from 1978 through the Sevel Nord (the Ulysse minivan, Phedra, 807 C8 and light
commercial and Jumpy, Expert and shield produced in Valenciennes) and Sevel Sud (Jumper,
Boxer, Express and Duchy produced in Atessa in Abruzzo), covenants that will be valid until
2017. Both Fiat and Peugeot are managed by families and have super competitor ranges and a
well-established leadership for the Diesel. Peugeot had signed a series of agreements that proved
very effective as that for diesel engines with Ford and BMW with petrol, while not happened the
same thing about small cars as the C1/Aygo/107 had not yielded the desired results.
However, it was to understand whether the agreement between Peugeot and Fiat would
really go well for a number of reasons that it is not appropriate to list, since the work is focused

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on Fiat and Chrysler. Said that, it was necessary to see how the boards of Fiat and Chrysler could
integrate each other; whether Daimler would remain and how, possibly, the Italian automaker
could obtain a greater share of 35%. There were two options: money or stock exchange, but
Chrysler at the time, did not have the liquidity necessary to ensure that its investors would lose as
little as possible, so Cerberus could exit the American automotive group. Then the question
would move on a political and financial level to give to Fiat what (at the time) Cerberus had.
Thanks to the due diligence required by the letter of intent, Fiat could have had
(Chrysler was not publicly traded) free access to Chryslers accounts and then figure out whether
the Alliance could be profitable and if its help could be really important for the American
automaker89. However, the Alliance between Fiat and Chrysler did not solve the problems of
Fiat. Marchionne in fact stated that the volume needed to survive in the future was to produce at
least 5 million cars. Fiat was missing 1 million thus if it had not created the hoped grow it would
have been necessary the entrance of a third partner. At the same time the Fiats CEO stated that
in the future would remain up to 5 or 6 manufacturers in the world automobile market. During
the 90s, many people had supported the same thesis and at the end of the first decade of 2000
the results of that process were quite obvious, because the alliances between large automotive
groups have completely dissolved doing illustrious victims (such as Chrysler), apart from the
alliances created by BMW, Renault and Volkswagen. Volkswagen at the time was bought by a
small manufacturer like Porsche that became one of the most profitable automaker90.

It is of fundamental importance to underline that the agreement between Fiat and Chrysler was
signed on 30th April 2009. As well as we have already seen that agreement says that Fiat could
increase its share in according to several steps that Chrysler has to take. With regard to this point
it is necessary to mention the later stages of the agreement.


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3.7 Negotiations between May and June 2009.

Chrysler had decided to sell its assets to a company (Fiat) that was controlled by Union
UAW, U.S. Treasury and Canadian Government. The sale relied on a particular auction
because it was already known that the Italian automaker would reach an agreement with the
American group. However, the competing bids should have been received by May 20 as the 27
would be declared the winner. For the assets of Chrysler, Fiat would offer 2 billion. The
bankruptcy court in New York had allowed an accelerated procedure for the restructuring of
Chrysler, which was further facilitated through a loan of 4.5 billion dollars lavished by
Washington. This was a loan to which, the same court allowed Chrysler to access with the
condition that they realized the sale of assets to Fiat or reaching a similar agreement in less than
60 days. The Alliance between the two carmakers, backed by the White House, which had as aim
to let out as soon as possible Chrysler from the receivership, was opposed by creditors against
(the three investment funds of Indiana).
The lawyers of these creditors had filed with the Supreme Court the dossier of the sale of
Chrysler to Fiat. The goal was set to slow to reach the agreement because the sale of other assets
to a new company controlled by Fiat was judged a violation of property rights and the
bankruptcy code. What is more, there was also the possibility of incurring in violation of the
rights of senior creditors and secured creditors that they would be reimbursed for the 29% of the
bonds they hold, however suffering a loss that would have amounted to 5 million. The Court of
appeals in New York had confirmed the opinion expressed by the bankruptcy court on the sale of
Chryslers assets to Fiat stopping the actual sale until June 8, 2009 in order to allow the same
funds to submit a further appeal to the Supreme Court. The appeal was due to be examined by
the judge Ginsburg91, who could act on her own or to benefit from the contribution of the entire
Court. On June 10 2009, the newspapers reported the news that the same magistrate and the other
eight judges of the Court rejected (permanently) the request submitted by three Indiana pension
funds to block the sale of Chryslers assets to Fiat. The magistrates motivated in their judgment,


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as investment funds were not able to demonstrate the need for an intervention by the highest
judicial authority.
The Treasury declared himself satisfied with the fact that no court, including the Supreme
Court, had found a problem in handling of the affair by Chrysler or Government. The acquisition
was announced on the same day, thanks to the Government that had funded the transfer, but also
thanks to the exit of Chrysler from receivership (it was from 30 April). The production would
have been restarted on June 29 in seven plants, which, at that time, had been forced into
inactivity, due to severe contraction in demand. In particular were restarted the Sterling Heights
Assembly Plant in Michigan where he produced the Chrysler Sebring and Dodge Avenger,
Warren Truck Assembly Plant, Warren, Michigan, where he produced the Dodge Ram and
Dakota, St. Louis North Assembly Plant in Fenton, Missouri, Toledo Supplier Park in Ohio
where they made the Jeep Wrangler and Jeep Wrangler Unlimited) Brampton Assembly Plant, in
In addition were also restarted the implants in Canada where they were producing the
Chrysler 300, Dodge Charger and Challenger, the Windsor Assembly Plant, and finally Toluca
Assembly Plant in Mexico where he produced the Dodge Journey and Chrysler PT Cruiser.
Thanks to technology, the new Fiat Chryslers production should have been made respecting new
standards on emissions of harmful gases that cars would be entered into force between 2011 and
2016, with the goal of lowering fuel consumption.
Before going ahead and analyze the different stages through which Fiat has increased its
stake in Chrysler, it is important to anticipate three fundamental points of agreement between the
two automakers. These are the so-called Performance Events, i.e., three events that must
occur for Fiat to increase its shareholding in Chrysler. But lets look more closely at what it is.
We have already seen that with the agreement signed in June 2009 Fiat obtained on 20% of
Chrysler, the next steps involve the already mentioned Performance Events which are93:


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1. The first Performance Event is achieved when Chrysler gets regulatory

authorizations for an engine FIRE by Fiat and undertakes to produce this engine
in the United States.
2. The second Performance Event is achieved when Chrysler will maintain total
sales outside of NAFTA Countries for 1.5 billion dollars and has signed
distribution agreements in South America some of its products.
3. The third Performance Event is achieved at a time when Chrysler has obtained
permission to manufacture a car based on a Fiat platform with a consumption of
at least 40 miles per gallon. Chrysler must produce this car in the United States.
It is important to stress that the agreement between Fiat and Chrysler had the right to buy a
specified number of shares at a predetermined price (the so-called call options). Fiat could
receive an additional 15% stake until Chrysler, where they had met the three Performance
Events. However, for each Performance Event not reached by January 2013, Fiat could buy its
5% stake by exercising the first right to call (Alternative call Option). Inter alia, Fiat could
enforce a second right to call to buy another 16% stake of Chrysler (Incremental Equity Call
Option). Fiat could exercise these two call options from January 2013 to June 2016. If at the time
of the exercise of these options call Chrysler is a listed company, that price will be based on the
values of the stock exchange. We must bear in mind that these are followed a few other clauses
that we have analyzed and deepened following pages, considering the various stages of the
acquisition process taking account of their respective dates94.


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3.7.1 January 10, 2011

The January 10, 2011, Marchionne, CEO of Fiat and Chrysler announced officially that
Fiat had increased its stake in Chrysler from 5% to detain the 25% stake in American automotive
group. To reach the first of the three performance event contained in the agreement of June 10,
2009, increased participation of Fiat Auto has been tripped. The first of the three performance
event stipulated that Fiat should realize the engine FIRE (Fully Integrated Robotized Engine)
aimed at American production. The Fiat 500 was supposed to be the first car to have the 1.4
FIRE engine with MultiAir technology; the car was supposed to be distributed by Chrysler
Group. After reaching 25% of Chrysler, Marchionne has demonstrated quite optimistic about the
eventual growth of Fiat shares up to 51% by the end of 201195.
On the same day, Marchionne announced that in 2012 the Alfa Romeo could enter in the
American automotive market with Alfa Giulia. The Giulia was held by Fiat the car more suited
to American target because was created on American platform. However, the real intention of the
CEO of Fiat and Chrysler was to transfer the full range of Alfa Romeo in the United States. The
news of the raise of Fiat in Chrysler from 20 to 25% did jump the title in the Milan Stock
Exchange and Fiat shares was at +2.42%. After the conclusion of the operation above described
the situation of Chrysler's capital was as follows:

UAW VEBA 63,5% of the share capital;

Fiat 25%;

The U.S. Treasury 9,2%;

The Canadian Government 2, 3%96.



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3.7.2 April 12, 2011

Although the conditions for the agreement are changed, the Fiat share in Chrysler
continued to increase as expected. The 12 April 2011 the Fiats stake in Chrysler grew from 20
to 30%. The increased stake of Fiat was linked to the completion of the second of three
Performance Events as stated in a recent revision of the agreement of June 10, 2009, which
broadened the partnership between Chrysler and Fiat, bolstering the position of Chrysler Group
in international markets. The second consisted in meeting Performance Event by the American
automaker's cumulative revenues greater than 1.5 billions of dollars arising from sales made after
June 10, 2009 outside of Canada, Mexico and the United States (NAFTA Countries). The second
step involved also subscribing to 3 further agreements by Fiat or its affiliates97:

The first was to involve at least 90% of Fiat dealers in Brazil, in the distribution of

one or more car Chrysler (which could also include car sold by marks of Fiat Group

The second was to affect at least 90% of Fiat dealers in the European Union in the

deployment of one or more car Chrysler (including those sold with one of Fiat Group
Automobiles), bearing in mind the aspects relating to stamps of CO2, the aggregation of Chrysler
Group and Fiat cars in the European Union;

The third and final agreement called for the remuneration of Chrysler Group for

use by Fiat or Chrysler technologies linked outside of the NAFTA countries.

Fiat could reach 35% of Chrysler when it realized the third Performance Event, tied to
commercial production in the United States of a car from Fiats platform with a performance at
least 40 miles per gallon. The aim for Fiat remained however to get to 51% of Chrysler and
therefore control the American Group. It is important to note that the transition from 35 to 51%
would no longer be free because on the basis of the agreement of 2009, Fiat could have an option
to acquire 16% of Chrysler but only through the issuance of new shares for cash. The funds paid
by Fiat would strengthen the assets of Chrysler.
If Fiat had made the purchase before the IPO (Initial Public Offering) would have to pay
a fixed price linked to its multiples and linked to the multiples of its competitors. Once Chrysler

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had been publicly traded Fiat would, however, paid the market price that made the company look
to buy as soon as possible. The agreement stipulated that the option on 16% would be valid from
1 January 2013, though, could be anticipated if Chrysler had returned the 7.4 billion received
from the U.S. Treasury and Canadian Government. Thats why Sergio Marchionne initiated
negotiations with banks, especially American banks, for obtaining credits and funding to replace
state ones. The CEO of Fiat and Chrysler expressed hope that everything could be carried out by
June 2011 to allow Fiat to exercise an option technically to purchase that 16% that would have
allowed him to get to 51% and the control of the American automaker98.
The repayment of credits received should not be an obstacle because it also could have
been used the $ 3 billion that Chrysler was to receive from the U.S. Department of Energy as
funding research on new technologies. In any case, if there had been an accident (late or nonarrival of the funds) Marchionne could use an alternative that would allow him to bring down the
debt with the U.S. and Canada Chrysler under $ 4 billion. To achieve this goal would have been
sufficient refinancing by private banks, but then Fiat could achieve only 49.9% but not the 51%
expected. However, Fiat would take into its own hands, a large part of the share of Chrysler,
obtained with the discount that we already talk about, which would also allow to pay a little more
the remaining 1%.
It was not easy to predict the date of the IPO (Initial Public Offering) which was linked to
two points: the market situation and the needs of American partners. The most optimistic
speculated November 2011, which coincided with the return to Wall Street to General Motors,
others thought early 2012. Anticipate the times however it would have been convenient to public
partners, particularly the US Treasury who wished to get rid of an inconvenient package from a
political point of view, given that in 2013 there will be the presidential elections. Even the Fund
VEBA, as major shareholder of Chrysler, could capitalize on the expected growth of Chrysler's
accounts and in particular the shares sold by existing shareholders would go on the market
without excluding an increase of capital to consolidate the American company.


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Then the shares in Chrysler are divided as follows:

UAW VEBA 59.2%;

Fiat 30%;

U.S. Treasury 8.6%;

Canadian Government 2.2%99.

3.7.3 May 24, 2011100

The 24 May 2011 from Sterling Heights, Michigan, was given a double listing:

Chrysler he welded the debts totaling 7.5 billion dollars with the U.S. Government

and the Canadian Government.


Fiat increased 46% of its share in the capital of Chrysler, with the intent to arrive

no later than 2011, to surpass the 50%.

At the end of March, Marchionne, CEO of Fiat, said what the goal was: by the end of
2011 we will arrive at 51% of Chrysler, (Sergio Marchionne, CEO of Fiat and Chrysler, March
2011, As for that, the CEO also said that the debt had been paid, provided this
is necessary in order to exercise the option to bring Fiat to 46%. The venue of the event was
chosen specifically because Sterling Heights was one of the plants in 2009 risked closure. It was
the period when the American automaker was close to bankruptcy.
The loan repayment (5.8 billion to the U.S. Treasury and Canadian to 1.7), to which
Chrysler appealed to avoid the crack, was a very important step. Fiat, having agreed with banks
to refinance debt, would have exercised the option on 16 percent of Chrysler that enabled the
Italian automaker to rise from 30 to 46% of the share capital amounting to 1.3 billion. At this
point the share of 51% looked really close. According to the agreement, Fiat could obtain free of
charge a 5% of shares, if and when it made in the U.S. a green model, with consumption of
less than a gallon every 40 miles, approximately 17 km with one litre.


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What is more, on the previous day (May 23) Fiat opened a new salon in Michigan, with
the goal of reaching 130 U.S. dealerships by the end of 2011, dealerships that were at that time
58. On May, 24 2011, for the first time, was presented the new Lancia Y to 5 doors that was put
on sale a month later in Italy and in the rest of Europe (not in Britain, where it arrived in
September under the Chrysler brand). The Lancia Y was a car that Fiat aimed very much on the
European market, because the Lancia-Chrysler's goal was to sell 120000 pieces year by year
starting in 2012. In few words, the brand Lancia aimed to double sales in 2014, taking them to
240000 per year from 120000. The car is still produced in Tiki, in Poland, with an investment of
approximately 500 million euros. In the future, the intention is to sell it in other countries like
Japan, Korea, South Africa and Australia.

3.7.4 June 3, 2011101

The 3 June 2011, the Treasury gave the news that they have reached an agreement to sell
Fiat its 6% stake in Chrysler holding, for 500 million dollars. This sealed the exit from carmaker
controlled by Fiat of the U.S. Government and Fiat would rise to 52% of the share capital. On
the Milan stock exchange the titles of the Italian automaker did score jumped by more than 4%
for Fiat and 2.6% for Fiat Industrial in a market increase (0.4%) shy. Fiat would exercise this
purchase option within the twelve months following the repayment of the loan from 7.6 billion
dollars granted by American Governments (5.9 billion) and Canadian (1.7 billion) in 2009 to
Chrysler, about the bailout plan.
The loan was repaid on May 24 with six years in advance and, in addition, Fiat increased
participation from 30 to 46% of the share capital with a payment of $ 1.3 billion. On 27 May,
Fiat announced it had decided to exercise the option, it was simply necessary to agree on the
price. In addition to the 500 million agreed for the 6% stake, Fiat would have to pay another 75
million to secure the rights to purchase of 45.7% of Chrysler, controlled by the VEBA Fund,
managed by the UAW. Of these 75 million, the Treasury would receive 60 while the remaining

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15 million would go to the Canadian Government that was owner of 20% on sales rights of
VEBA. Fiat would exercise the option from July 1, 2012 to December 31, 2016 and so increase
its share over 70%.
Once Fiat has acquired the VEBA, became less urgent the need to launch a takeover bid
for Chrysler, which otherwise would have been necessary in order to enable the Fund to
monetize the participation of Fiat. For the same reason Marchionne had all the time to decide to
establish the ways and times of entering the stock market. The operation just described came two
years after the release of Chrysler from receivership. For Chrysler also coincided with the return
to profit of 116 million dollars in the first quarter of 2011 (as opposed to a loss of 196 million in
2010), an increase of 18% in sales and the goal to reach by the end of 2011 2 million cars sold,
accounting for 32% and 500 million net profits.

3.7.5 July 21, 2011102

The 21 July 2011 Fiat brought his stake to 53.5% of Chrysler acquiring Canada's
participation equal to 1.5% and paying the sum of 125 million dollars. Fiat also acquired 6%
stake that was owned by the U.S. Treasury Department by paying 500 million United States
dollars, in accordance with agreements concluded between the parties in early June. These
agreements provided that the U.S. Treasury Department ceded to Fiat rights that were up thanks
to Equity Recapture Agreement; agreement between the Department and the Fund VEBA in June
2009, for an amount equal to 75 million dollars. Of these 75 million 15 million were transferred
to the Canadian Government as envisaged by agreements between the Government of Canada
and the U.S. Treasury Department. This allowed the Fiat getting to hold the share of 53.5% stake
in Chrysler. This situation resulted from the breakdown of Class A membership interests owned
by several members, including Fiat, deriving from the attainment of the ultimate performance
event. Thanks to the completion of the last performance event, Fiat would have gotten the 58.5%
stake in Chrysler.

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3.7.6 January 5, 2012103

Fiat acquires another 5% of Chrysler that increases its holding in the company to 58.5%.
Sergio Marchionne commented: it is an important step towards the completion of the
integration between our two groups, (Sergio Marchionne CEO of Fiat and Chrysler, 5th January
2012, The news is confirmed after Chrysler reaches the third performance
event (Ecological Event). This performance is linked to two major aspects:

the production by Chrysler approval Bill for a car based on a Fiat platform or

other technology, which has a consumption of no less than 40 miles per gallon;

Chrysler must absolutely be committed to start producing such car on an industrial

scale in the United States.

Already at the end of December a prototype of the Dodge Dart, based on a Fiat
platform, centered perfectly the requirements exceeding the Fuel Economy Test with a combined
consumption of 40 miles per gallon. The day after Chrysler was totally committed with the
Treasury Department of the United States to engage in the production of this vehicle in an
establishment in the United States.
The achievement of Ecological Event - says Marchionne - is a goal to which we have
worked extensively over the past two and a half years. I am particularly pleased to have
achieved, because it allows us to repay the confidence in Fiat's ability to bring in United States
car and low fuel consumption engines. For Marchionne commitment in terms of ecological
and sustainable mobility, which already sees the Fiat as the greenest House in Europe, is an
integral part of our business strategy. It is a heritage of great value that, coupled with skills
developed by Chrysler, makes us a strong car builder and competitive, with a level of technology
among the most innovative and advanced in the world104, (Sergio Marchionne CEO of Fiat and
Chrysler, 5th January 2012,
When they arrive the news regarding the progress of the automotive market in the United
States, it should be noted that, for 2011, Fiat-Chrysler Group boosts sales increases of 26%, level

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never achieved before by any automaker. For Chrysler, now controlled by Fiat, the month of
December has made a huge leap of registrations up to 37% compared to the same month of 2010.
This can be considered a record, especially if we take into account that comes after almost two
years of increases in sales and after seven months of an increase equal to 20 per cent. The
Chrysler Group closed a year of growth with a strong rise in retail sales for the month of
December that has increased by 45 percent, reaching the highest level for the past four years. In
2011 we have increased our market share of 1.3 percentage points becoming the car
manufacturer with the highest growth rate of the United States105, said Reid Bigland, President
and CEO of the Dodge Division and also Sales Manager for the United States. Unfortunately, to
be affected is the automotive market in Italy that undergoes a remarkable collapse equal to -10%.
The Fiat group receives even greater loss equal to 13.4%, with over $ 514,500 registrations
(about 29.4% of the Italian market). In December, Fiat is even worse, recording a loss of -19.7%
with 31,699 new recordings. Then after this operation now Chrysler is owned by Fiat and VEBA
as follows:

Fiat 58,5%;

VEBA 41, 5%.

3.7.7 July 3, 2012106

Fiat acquires a part of VEBA increasing its share to 61.8% of Chrysler and communicates
to U.S. Fund (Chrysler minority shareholder) that wishes to exercise its right to purchase a stake
from VEBA in the American automaker. The 2009 contract stipulates that, Fiat by 1 July and for
4 years can detect each semester the 3.32% stake of Chrysler VEBA Fund, at a price not
exceeding the market multiple of Fiat, Chrysler's EBITDA enforced over the past four quarters,
minus the net industrial debt. Thanks to the completion of the purchase, Fiat now owns 61.8%

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stake in Chrysler. VEBA is a fiduciary fund controlled by the UAW Union, for managing health
care for Chrysler retirees. The next option for Fiat will take only the January 1, 2013.
The operation on the purchase option proves convenient because the expected outlay for
Fiat, related to contractual parameters equal to less than 200 million euros, turns out to be lower
than what Fiat could pay relative to the entire option on the VEBA that would overcome the 5
billion (about 4 billion) of 41 per cent. Despite the increased stake, the Fiats income statement,
would not change because Chrysler is consolidated at 100% since June 1 2011. However, it is a
good investment because Chrysler this year will have results significantly better than those of
Fiat, also thanks to the recovery in the US market. Sergio Marchionnes goal remains to get the
100% of Chrysler, bearing in mind that the purchase of additional quota equal to 38.2% VEBA
could be done through negotiations not yet started. For the moment it is not listing of Chrysler,
as from January 1, 2013 the VEBA Fund may request registration of securities in anticipation of
an initial offering (IPO).

3.8 Fiat & Chrysler after the deal: comparison.

The plan envisioned by Marchionne for the years 2010-2014, estimates a level of sales
for Fiat Group Automobiles as follows107:


2 million cars sold;


2.3 million;


2.7 million;


3.4 million;


3.8 million.

Marchionne also includes targets for each country until 2014: a sale of cars and
commercial vehicles in Europe totaled 2.150.000; 1.125.000 in Latin America; 90.000 in Turkey,
while expected sale of 300.000 car in China (which represents 2% of the market share), a sale of

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280.000 auto and LCV in Russia (7% of the market share), a sale of 130.000 pieces in India (5%
of market share) and a sale of 105.000 auto (Fiat and Alfa Romeo) in North America. From here
we must exclude about 100.000 Fiat 500 produced by Chrysler and sold both in NAFTA
countries and in Latin America. That said looking at the table below it is easy to understand that
Fiat Group it is not absolutely meeting the levels of sales that the CEO of Fiat and Chrysler was

Figure 3. Quarterly sales of Fiat Group 2009/2012. Source:

The 2010-2014s plan for Chrysler sales totaled 2.800.000 cars in 2014. That said it is
interesting to note through the data of table 4 below that before being absorbed by Fiat, Chrysler
suffered much in the way of sales with a nearly -35% in 2009. Starting from 2010 there is a
gradual growth mainly due to the agreement with the Italian automaker. The table shows that in
2010 Chrysler had a 14.5%. In 2011 the further increase sales by reaching a 20.3%. In this way
the Chrysler returns to profit after 5 years. The first quarter of 2011 closes with a profit of $ 116
million while in the 2010 the first quarter ended in red with a loss of -197 million. Revenues
climbed up to 13.1 billion dollars equivalent to 35% more than in 2010109.
In the first two quarters of the 2012 Chrysler already shows a growth compared to 2011
with a 23.23% outperforming even the level achieved in the prior year. All this, despite the


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serious time of crisis in which is located the entire automotive industry. The data reported take
an extra importance if we think that Chrysler produces the largest number of sales in countries
like United States, Mexico and Canada where sales in 2011 reached are respectively: 1.349.345;
225.600; 82.072. In Europe sales are not as substantial as in 2011 were only sold specimens

Figure 4. Quarterly sales of Chrysler 2009/2012. Source:

Since the last table is clear how Chryslers performance is significantly better than the
performances of Fiat in terms of car sales. It seems so easy to say that Chrysler is getting much
better results than Fiat. Results that are going well beyond the most optimistic expectations so
much that Chrysler is literally flying through the automotive market. If we analyze the data in
table 5 below, it is easier to understand what we just said. The table is a sum of the previous two
tables because reported data on sales of Chrysler and Fiat Group Automobiles together110.


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Figure 5. Quarterly sales of Fiat Group & Chrysler 2009/2012. Source:

We can then move to analyze the financial situation of Fiat-Chrysler Group bearing in mind
recent data and existing data.

3.9 Fiat plan 2010 /2014 financial targets.

Lets talk about the financial targets of Fiat-Chrysler Group forecasts by Marchionne
through the plan 2010/2014. All the data we are mention are showed in the table n.5 at the end of
the paragraph. With regard to the Margin the Fiat-Chrysler Group target for 2014 is between
6.9% and 7.7%. The target audience for the Trading Profit is about 6.4 billion, with an
Operating Margin above 7%. This could represent a new record as the previous record stood at
3.4 billion reached in 2008. In 2014 are expected Revenues of around 93 billion. It would be
the highest revenue level ever achieved in the history of the Group with an increase of 55%
compared to the record reached in 2008. The plan provides for the Group a Net Income in 2014
about 5 billion. If the predictions of Marchionne will materialize in 2014 the Group will have
the cancellation of the Industrial Debt with 3.4 billion of Net Cash. EBITDA related to

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industrial activity should grow steadily year by year; in 2014 EBITDA will attest in a range
between 11.7 and 12.5% of revenues111.

Figure 6. Financial targets of Fiat-Chrysler Group. Source:

In terms of Euros during the 5-year Plan EBITDA of industrial activities will be in a range
between 36 - 38.6 billion. If we take a look at the Net Income it shows that while in 2009 the
Group showed a Break Even, for the 2014 forecasts talk about a Net Income of 4.8 - 5 billion,
with earnings per share from 3.72 and 3.88 Euros. From 2009 to 2014 industrial Net Debt will
decline gradually (from 5 billion in 2010 to 3.4 billion in 2014) reaching positive cash
position in the last year of the plan112.
In 2011 the targets of the Fiat-Chrysler Group have been achieved and in some cases
exceeded despite uneven trading conditions above all in Europe. The Group was able to close the
2011 with the following data113:

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Revenues for 59.6 billion ( 23.6 billion Chrysler and 36 billion Fiat Group

Trading Profit of 2.4 billion with a margin of 4.0%;

Net Income of 1.7 billion;

Net Industrial Debt reduced to 5.5 billion in line with plan above showed;

Total Available Liquidity of 20.7 billion.

Watching 2012 data of Fiat-Chrysler noted that generally the Group presents good results
only thanks to the American automaker. The group closed the first half of 2012 with revenues of
41.7 billion Euros of which 17.9 billion concerns the only Fiat and representing a decline of
6.6% compared to the second quarter of 2011. That decline is due to the contraction of the
European market. The positive news for Fiat come from so-called luxury brands (Ferrari and
Maserati) who have achieved revenues amounting to 1.4 billion with a year-over-year growth of
10% above all thanks to the performances obtained in Asia and North America114. With regard to
the second quarter Fiat Group makes record net profit of 358 million Euros, however, excluding
Chrysler there is a loss of 246 million Euros compared to profit of 1.38 billion in the second
quarter of 2011. In terms of revenue, the Group has closed the second quarter with 21.5 billion
Euros. Revenues of Fiat (Chrysler excluded) were equal to 9.2 billion Euros, representing a fall
of 7.5% compared to the second quarter of 2011115.
The cause of the decline is attributable to a decrease in sales volumes in Europe (Italy in
particular) where market conditions remain very difficult. However Fiat confirms what the
targets were under the five-year plan though with some modifications as we will see later on.
After finding the real economic situation in the various countries market expectations of
positive results remain the same with regard to Latin America, Asia Pacific and North America.
With regard to the Euro Area there is a degree of uncertainty regarding the economic activity
because it is necessary to consider the persistence of an economic/financial situation particularly
depressed. The hope is that this situation will change soon with a gradual stabilization



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predictable only for the end of this year. By virtue of what we just said the target of the FiatChrysler Group for 2012 are as follows116:

Revenues exceeding 77 billion;

Trading Profit between 3.8 to 4.5 billion;

Net Profit between 1.2 to 1.5 billion;

Net Industrial Debt between 5. 5 to 6 billion.

After speaking of Mergers & Acquisitions we saw closely the stages of agreement
between Fiat and Chrysler. In general, the Alliance between Chrysler and Fiat can be seen as the
result of a process of diversification, achieved through the acquisition of a portion of the two
companies. Seen from another side the Alliance is primarily an indirect consequence of the
financial crisis of the past two years. There are two main reasons behind this Alliance:

The need for Chrysler to exit from the crisis and save himself from bankruptcy;

Fiat will access the American market facing a new challenge with the introduction

of the Fiat 500 and Alfa Romeo.

With this agreement was born the sixth pole of worldwide automotive that will compete
with competitors such as Toyota, Nissan, Volkswagen and Ford just to mention the most
important. The realization of economies of scale and synergies are two other important
objectives that the two carmakers set out to achieve by exploiting the complementarity of the
same two companies in terms of technology. Keep in mind that Chrysler and Fiat are committed
to the realization of 7 patterns through the use of Fiat platforms that will produce not only the
Fiat 500 but also fuel-efficient models and less polluting. In conclusion we can say that it is a
Masterpiece by Sergio Marchionne as well as has been defined by many newspapers (e.g.
Financial Times, Il sole 24 ore). It has been defined a Masterpiece because the CEO of Fiat
and Chrysler has managed to acquire Chrysler without paying a Euro cent.

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It is important to stress that this Alliance was born in a period of severe economic crisis,
especially in the auto industry. In Italy the Fiat is considering closing some plants such as those
of Pomigliano dArco and Termini Imerese where workers are already in layoffs. These
installations are no longer considered competitive in terms of production. The data that we have
listed in the performance of work do understand how Chrysler alive sometime significantly
better than Fiat both in terms of sales in terms of revenue.
From this point of view it seems that the Alliance between the two carmakers is Fiat more
than passing on to Chrysler especially if we pause to look at the data for the first two quarters of
2012. The exploit of Chrysler is mainly due to the sales growth in countries like USA, Mexico
and Canada while in Europe sales continue to go slowly.

To conclude what we have mentioned above if we have a look at the table below it is easy
to notice that the bad situation which that Fiat is living reflects also the rating. The rating is a
method used to classify both the bonds and the companies, based on their risk. According to the definition of rating is: An assessment of the credit worthiness of
individuals and corporations; It is based upon the history of borrowing and repayment, as well
as the availability of assets and extent of liabilities117, ( The rating is
expressed through a vote in letters, according to which the market establishes a risk premium to
require the company to accept that particular investment. Going into rating increases the risk
premium required, then the issuer must pay a spread greater than the risk-free rate. The ratings
are published periodically by specialized agencies, mainly Standard & Poors, Moodys and
Fitch Ratings.


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The Fiats rating is:

Figure 7. Fiats Rating. Source:

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Summing up what has been the work that I had in mind to develop, I believe I can say
that the objectives set on the three parts of the content identified in the introductory phase they
have been fully achieved in detail. To achieve these goals, I used a lot in research and analysis of
the materials is through the Internet or in the press and mass media in general. That said with
regard to the first part of the work the objective was to analyze structurally the Mergers and
Acquisitions of companies.
The achievement of this goal has allowed me to go to the second part of the work that I
carried out using the same parameters of research and analysis. This allowed me to consider a
number of the figures that have been the subject of various stages in the agreement between the
two automakers.
Finally, the third part I embraced all the steps related to the conclusion of the contacts
occurred along the path of negotiations in order to reach the final goal, which is the Acquisition
of Chrysler by Fiat. To develop the final phase of the work I used graphs and charts that can
make it easier to read and understand the topics discussed by me.
That said I would like to express my opinion about the work in general. I have chosen
M&A as a topic of my master thesis because I have been always interested on that and it was my
goal to develop my background and improve my knowledge about this argument. What is more,
it has been easy to choose the deal between Fiat and Chrysler as a case study for several reasons.
Firstly it is an M&A example, secondly it is developed nowadays thus is absolutely actual,
thirdly I would like to know more how Marchionne (CEO of Fiat and Chrysler) has been able to
sign such a deal. Talking about the case study my opinion is the following.
After having seen Chrysler close to bankruptcy Marchionne thought that it could be the
best time for a partnership. At the very beginning of the negotiations still was not clear what
could arise from the final agreement. With regard to this point even many newspapers and
economists were skeptical about a positive conclusion of the agreement. But Fiat was like a
sheet anchor for Chrysler and thus the deal was soon signed up. After that there are several
dates when Fiat was able to increase its Chryslers share meeting the performance events

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mentioned in the third part of the thesis. However, Fiat nowadays is not going well in terms of
sales, Chrysler is definitely much better than the Italian automaker. I believe that Fiat is hanging
on Chrysler and actually the alliance is more productive for the American automaker than for the
Italian group. Marchionne said that everything is going well in Fiat and he also said that Chrysler
is improving month by month. I do not agree about Fiat since to the fact that probably some
establishments are going to stop and this is not a good trend for a firm.

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Bibliography and websites:

Donald M. DePamphilis Mergers, Acquisitions, and Other Restructuring Activities: An

Integrated Approach to Process, Tools, Cases, and Solutions, 5th edition, Elsevier Academic
Press, 2010;;;

Martin Lipton Mergers and merger waves and the factors that give rise to them have

been the subject of intense interest for more than a century September 14, 2006


















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History of Chrysler;;;;;; Storia della Fiat;;

December 2008, Il Sole 24 ore;


Fiat-Chrysler: option for 55% (WSJ) Wall Street Journal;

January 2009, Il Sole 24 ore;







P a g e | 81;;, the hedge funds;;;











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