Fiat - GM Deal Over
Well, the fear of a Corvette by Ferrari are over...
Feb. 13 - General Motors said on Sunday that it would pay Fiat $2 billion so that it would not be forced to take over Fiat's ailing auto business, resolving a dispute between the two that had threatened to become a court battle.
The companies also dissolved a five-year-old industrial partnership in which they jointly produced engines and transmissions in Europe and Latin America and jointly purchased parts, though they said they would continue to cooperate in some areas.
"The settlement reached with G.M. is fair to both sides," said Sergio Marchionne, Fiat's chief executive, in a news conference at the company's Turin headquarters on Sunday. "We can now clearly focus on the operational objectives of Fiat Auto," a subsidiary.
Rick Wagoner, G.M.'s chairman and chief executive, said in a statement, "We believe that we have reached a fair and equitable agreement."
But the settlement comes at significant cost for G.M.
The company said it would take a charge of $840 million, or $1.49 a share. G.M. executives said they would decide over the next week whether to take the charge in the fourth quarter of 2004 or the first quarter of this year. If the charge comes in the first quarter, it will represent at least 30 percent of the earnings range that G.M. has projected for the full year.
The payment resolves an increasingly contentious dispute between the two companies over one aspect of their partnership. As part of the joint development and purchasing deal struck in 2000, Fiat negotiated the right to sell its auto business to G.M., a right known as a put option, which came into effect this year and lasted through the decade.
The Fiat deal was one of several alliances around the world that Mr. Wagoner has pursued in an attempt to cut costs so his company could better compete with Toyota and other more profitable automakers.
But the partnership began to deteriorate at least two years ago as Fiat failed to turn around its money-losing car unit, which accounts for about 40 percent of its sales. G.M.'s own European operations have also struggled mightily. The put option became a cloud over G.M. and was looked on by some analysts as an unfortunate concession by Mr. Wagoner.
As part of the original deal, G.M. spent $2.4 billion of its stock to acquire a 20 percent stake in Fiat Auto - 10 percent after a later recapitalization. On Sunday, G.M. agreed to pay another $2 billion to avoid the risk of having to buy the rest of the division, severed most of its ties to the company and returned its Fiat Auto stock to Fiat.
In an interview Sunday afternoon, Mr. Wagoner was adamant that over the next four years, G.M. would make more in past and future cost savings than the money spent on the deal.
"Unequivocally, this was a good return on investment for our shareholders," he said, adding that G.M. saved $1 billion last year alone from cost savings related to the partnership.
He said he saw the deal early on as a way not just to cut costs but also to help G.M. expand its offerings of diesel engines. Nearly half of the cars sold in Europe are now equipped with diesel engines, but the technology is essentially restricted to pickups and commercial trucks in the United States, G.M.'s home market.
In 1999, before the deal was struck, Mr. Wagoner said G.M.'s diesel sales were in the low 20 percent range of its overall sales in Europe. Today, he said they were in line with the rest of the industry.
"That's been half of the big value for us of the deal," he said.
Much of the value, he said, also came from cost-cutting by joining the manufacturing and development of engines and transmissions as well as establishing a joint purchasing operation. The companies will both have intellectual property rights to two kinds of diesel engines used for a variety of vehicles as well as a six-speed transmission. They will also jointly own a Polish plant that produces one of the diesel engines.
The payout is less than a fifth of the more than $10 billion in debt that is carried by Fiat's auto unit and that G.M. risked having to assume.
"It's easy to Monday-morning quarterback the whole deal, but effectively you've paid $2 billion to get out of something that could have cost you a lot more," said Stephen Girsky, an analyst at Morgan Stanley.
For Fiat, the money is a much-needed cash injection at a time when its car business is losing several million dollars a day. But it will not be enough to resolve its problems. Fiat Auto has had an operating loss in five of the last six years and is not forecast to break even until next year. The Agnelli family, which controls Fiat, has said that it does not want to sell the car unit. Though tarnished, Fiat Auto remains an Italian icon.
The accord occurred after two months of negotiations, often directly between Mr. Marchionne and Mr. Wagoner.
G.M. had said for some time that Fiat voided its put option by recapitalizing in 2002. Fiat has vigorously disagreed with that assessment. Both sides had threatened legal action, but it was clear that they wanted to avoid what would have been a drawn-out legal battle.
Luca Cordero di Montezemolo, Fiat's chairman, said Sunday that Fiat would have exercised its option to sell its car unit in the coming days had an agreement not been reached.
Mr. Wagoner said that G.M. believed it would have prevailed in court but preferred to resolve the matter.
"The probability of the put being exercised was low, but once you get in the legal system you can't say the probability is zero," he said. Settling, he said, "would be a better deal than going into a protracted period of legal dispute."