How To Flop An M&A Deal - BusinessBlog : McGraw-Hill
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How To Flop An M&A Deal

How To Flop An M&A Deal

Financial expert, Michel Fleuriet explains what went wrong in the FCA and Renault merger and the similarities to previous automobile mergers from the past.

On May 27, 2019 the Italian-American group Fiat Chrysler Automobiles (FCA) proposed to the French group Renault a merger of equals to build the third world group in the sector.

FCA is an Italian-American company created by the Italian auto company Fiat following the takeover of Chrysler in 2014. Renault is a French car manufacturer, linked since 1999 to the Japanese Nissan and since 2017 to Mitsubishi, through the Renault-Nissan-Mitsubishi Alliance which was the world’s largest automobile group in 2017.

Renault’s Alliance partners, which had not been involved in preliminary discussions with FCA, had been informed of the project the day before the announcement. FCA had set a deadline of a few days for the response. As Renault was asking for more time, FCA withdrew its offer.

This episode illustrates everything you can do not to succeed in an M&A deal. Besides, there is a lot of resemblance to another deal in the automobile that ended badly, the merger between Daimler and, already, Chrysler (Chapter 15).

According to the proposal made by FCA to Renault, the new group would have been owned 50% by the shareholders of the Italian-American manufacturer and 50% by those of Renault, what is called a merger of equals. A problem was that the French state owns 15% of the capital of Renault and that does not simplify matters. On top of that, mergers of equals have never been successful in the automobile sector as the example of the deal Daimler Chrysler shows (Chapter 15). The FCA Group stressed that this merger would give birth to the world’s third largest automaker, with annual sales of 8.7 million vehicles. Size is an essential dimension in this industry and economies of scale must be analyzed in detail. The new group would have benefited from a “strong presence in key regions and segments.” The automotive industry is a cyclical industry: it is better to be diversified and to depend less on a region or a range of products. However, nothing is gained by a complementary of brands where one brand would be absent in a key region. The brand portfolio of the two groups is “broad and complementary, and would provide complete market coverage, from luxury to large segments » said FCA. This is an argument used in the Daimler Chrysler deal but it does not make much sense in the car distribution industry as I show in Chapter 15 of Investment Banking Explained.

The merger would not result in any closure of production sites, FCA still assured, citing annual synergies of more than 5 billion euros, which would be added to those already existing under the Renault-Nissan-Mitsubishi Alliance. But that’s precisely the key point: a Renault Fiat Chrysler merger makes no sense without Nissan and Mitsubishi. Functions such as purchasing, but also many technologies and the heart of the construction of an automobile, platforms, have been developed jointly by Renault and Nissan as part of the Alliance for 20 years as I have explained in my book Investment banking explained (Chapter 16). The future electric platform that will serve as the sole base for the electric cars of the three partners from 2021 has been developed jointly.

It took more than 6 months to identify the synergies of the Alliance when it was set up in 1999. FCA wanted an answer within 5 days! Nissan was asking for time to study the project, complex, and all its implications. The marriage of cultures and management had to be carefully studied. This operation could have been positive for Renault and FCA, provided that the future entity remains in the Alliance. It took time and work.

To read the rest of Investment Banking Explained order here.

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How To Flop An MA Deal

Michel Fleuriet was the Harry W. Reynolds International Adjunct Professor of Finance, Wharton School of Finance at the University of Pennsylvania, and the founder of Université Paris-Dauphine’s master’s program in investment banking. Prior to his career in academia, Fleuriet served as chairman of HSBC France, chairman and head of investment banking at Merrill Lynch France, and CEO of Chase Manhattan France. He was for many years a professor of finance at HEC and holds a PhD in law from the Université Panthéon-Sorbonne and a PhD in finance from Wharton. His principal experience is in corporate finance and mergers and acquisition.