Renault-Nissan-Fiat Merger: Call Us Skeptical

By David Fisher
FCAU

Disclosure: The author of this report has a long position in Fiat Chrysler Automobiles NV (NYSE:FCAU; IM: FCA). Positions can change at any time without notice.
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Overview

The Financial Times is reporting that Renault (EPA: RNO) plans to restart merger talks with Nissan (TYO: 7201) within a year, following which it hopes to merge with Fiat Chrysler (“FCA”; BIT:FCA; NYSE:FCAU). The strategy is apparently consistent with one previously pursued by former Nissan CEO Carlos Ghosn.

This news comes after recent rumours that FCA and Peugeot could merge – a combination that we thought made sense but which the WSJ reported is unlikely to occur.

In contrast, a Renault-Nissan-Fiat merger seems fraught with risk and, practically speaking, unworkable.

Why It Won’t Work

Recall Chrysler’s merger with Daimler Benz. Consummated in 1998, the marriage lasted 9 years and resulted in a huge loss for Daimler who ultimately offloaded Chrysler to private equity firm Cerberus Capital Management in 2007. Large cultural differences between Daimler and Chrysler combined with an inability to realize expected synergies ultimately doomed the merger.

Now think about merging three companies with distinct cultural differences and you begin to see the scale of the problem. We believe major clashes would ensue, particularly over cost cutting initiatives – one of the main selling points of a merger. Layoffs would likely be subject to intense political pressure, which would be exacerbated by the global nature of the combined company.

As such, we believe synergies would very difficult to realize and potential clashes would cause operational challenges (like what occurred with Daimler Benz and Chrysler). We therefore believe such a merger is unworkable.

Why Renault And/Or Its Bankers Want It To Work

The strategic rationale for combining Nissan, Renault, and FCA is clear – to create the world’s largest auto manufacturer by volume with scale in every region it operates in.

The table below shows the sales/production volume for Renault, Nissan, and FCA and their sales/production by region. Note that the figures in the table are only roughly representative of the combined company due to variances in the way each company reports its figures.

 

The combined entity would be the second largest manufacturer in EMEA, behind only Volkswagen, and the largest auto maker globally, exceeding Volkswagen by more than 3 million vehicles:

 

The financial rationale is also quite clear – to share vehicle platforms and research & development budgets leading to significant overall cost savings. By sharing resources, the combined company could realize large cost savings – on a spreadsheet.

However, the real-world operates much differently than a spreadsheet. Mergers often fail to realize the touted synergies even when they are quite simple. But this is no simple merger – combining three separate companies operating out of different countries would be an immense task, and one the would likely fail to realize anything close to the expected savings.

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