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It's not as if General Motors doesn't have pressing business at home. The stock has fallen 50 percent since 2000, as sales shrink and market share dwindles. The mother company had to take over the imploding Saturn division last week, and a pension time bomb threatens the whole operation. Yet, as his Detroit house burns, CEO Richard Wagoner Jr. is jetting abroad this week on a desperate mission to avoid buying the 90 percent of Fiat that GM doesn't already own.
The last thing in the world GM needs right now is to be saddled with a car company with worse troubles than its own. So what's going on? In a strange deal cut five years ago, GM took a $2.4 billion stake in Fiat, and granted the Italian automaker a highly unusual "put option," which could force GM to buy Fiat outright. Privately, many in Italy believed it was a way for Fiat's proud patriarch, Gianni Agnelli, to prepare to dump the company without actually having to sell it himself. At the time, global mergers were all the rage, and Wagoner was apparently driven to grant the option out of fear that Daimler of Germany, which had just acquired Chrysler, would get Fiat, too. The option can be exercised starting on Jan. 24, and has the potential to produce a rare, perhaps unique, hostile takeover, in which the seller forces the buyer's hand.
This is an open embarrassment to all involved. The last time Wagoner met with his Fiat counterpart Sergio Marchionne, in December, they ducked away to a secret location in Zurich to avoid the limelight. They're expected to meet again on Jan. 14, perhaps in Canada. Marchionne says GM has failed to deliver on promised investments in Fiat Auto, and appears quite serious about using the put option. That would cost GM roughly $8 billion for a carmaker that lost $1.7 billion in the first nine months of 2004, and that comes with massive debt and a "junk" bond rating. For Wagoner, this would be a new low in a series of money-losing acquisitions that could, some analysts believe, threaten his job. For Marchionne, and the Agnelli family that owns Fiat, it would be an admission that the former jewel of their industrial empire is no longer worth saving.
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It's certainly an extraordinary moment in business history, with the buyer at the mercy of the seller. Marchionne has commented acidly that GM's position on the agreement "has no legs," and in a recent report, Citigroup said that Fiat would probably win if it chose to enforce the put option in court. With bankers predicting that the revival in mergers and acquisitions will gain speed in 2005, this is also a cautionary tale about how not to get deals done. Remember, says Piero Manaresi, a partner at Bologna-based Aurea Corporate Finance, "about 60 to 70 percent of M&A activity ends up badly in 12 to 18 months."
GM's deal with Fiat dumbfounded outsiders from the start. The company's guiding philosophy has always been to be the biggest carmaker on the planet, says Micheline Maynard, author of "The End of Detroit: How the Big Three Lost Their Grip on the American Car Market." Wagoner became the company's president in 1998, and along with the then CEO Jack Smith, started to buy overseas. GM soon became the "most acquisitive" carmaker, with an eye on companies in Asia and Europe, says Ducker Worldwide analyst Ryan Tutak. He notes archly that acquiring all of Fiat would make GM the "Waste Management of the auto industry, and it has to stop collecting trash and start dumping it."
The Fiat deal was unique. None of the other GM purchases offered a similar put option. Most were relatively conservative, involving minority stakes. Still, few have performed well. In 1998, GM increased its stake in Isuzu to 10 percent; four years later the company paid $420 million to save the company from collapse. It bought out Saab of Sweden, which still sells sell poorly. In 2002, it picked up bankrupt Korean carmaker Daewoo. It also owns 40 percent of Russian carmaker Atovoz, which is "unimaginably bloated," says Tutak, using more than 100,000 workers to produce about 750,000 cars. So far, GM's only successful investments are in Suzuki of Japan and Shanghai Automotive Industry of China.
Originally, the company line was that Fiat's put option would help cement a promising partnership. Today General Motors officials say that back in 2000, Fiat wasn't in such dire straits--the stock was at $30, rather than $6, and the extent of its looming debt problems wasn't clear. GM did not want to cede the $50 billion European small-car market to DaimlerChrysler, which was already in talks with Fiat. A source familiar with the negotiations says the Fiat team was acting "high-flying, as if the road was all clear." There was a dealmaking frenzy in the air. Says Maynard, "The Fiat deal was put together very quickly. There were no leaks, if I remember. It almost happened over a weekend. They had their blinders on, frankly."
Fiat also felt pressure to seal an international deal, says Giuseppe Berta, who was responsible for the Fiat Historical Archives from 1996 to 2002. He also notes that Gianni Agnelli wasn't ready to sell Fiat outright--as Daimler wanted--and so preferred GM. Paolo Fresco, then head of the Fiat Group, used GM's fear of Daimler as leverage to get the put option. (Though a rare strategy, Fiat is in a similar dispute with Electricite de France over a $1.5 billion put option on Fiat Engeria.) The competitive pressure made GM miss some pretty big red flags, says Tutak, including the fact that Fiat's recent launch of a "world car," designed to sell in every market from Asia to the Americas, had failed, raising doubts about future lines.
Since then, Fiat has become a "basket case," says GM analyst David Healy at Burnham Securities. It has had five top- level management changes, and the deaths of Gianni and Umberto Agnelli have left no clear successor. Troubles began almost immediately. The American corporate types were "on another planet," culturally speaking, from the Agnelli family management at Fiat, says Manaresi. As Fiat's cash woes mounted--their cars just weren't selling--it sold off Fidis, the financial-services arm of Fiat Auto. GM claimed the sale breached the agreement and made the put option invalid. Over four years, the companies collaborated on only a few models, like the Croma, which will be launched in March. Would GM do it again? "Hindsight is 20/20," says GM spokesperson Toni Simonetti. Analysts also believe that GM never thought the put option would come into play.
The two sides may come to terms as early as this week. The leading bet was that GM would pay perhaps $1 billion to get out of the put option. If a deal isn't reached, a long court battle is likely. Citibank figures the chance that Fiat will go through with its threat to force GM's hand at only 10 percent. Yet the word in Turin is that the Agnelli family, exhausted by Fiat's perennial troubles, is now ready to let go, if GM won't pay up. One hurdle is political: GM is already laying off workers in Europe, and almost certainly would do the same at Fiat if it has to take control. On Dec. 23, Fiat workers protested the possibility of a GM takeover outside the company's Turin headquarters.
Even if things work out with General Motors, analysts say, Fiat will continue looking for more-willing partners and perhaps even a truly friendly buyer. The leading candidates include Renault, Peugeot and--in an ironic slap at GM--DaimlerChrysler. Italian companies, says Manaresi, usually "manage to get bigger and bigger, or they die." And Fiat is a very unlikely growth story.
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