Will the Fiat-Chrysler/PSA mega-merger work?

Fiat Chrysler and Peugeot’s owner PSA are tying the knot to tackle the structural upheaval in the car industry. Matthew Partridge reports.


Can Carlos Tavares work his magic again?

This week saw a deal that will "reshape the car industry as it undergoes a period of transformation", says Michael Pooler in the Financial Times. Fiat Chrysler and France's PSA, the owner of Peugeot, have agreed to create "the world's fourth-largest carmaker by output".PSA's and FCA's shareholders will each take a half-stake in the new company, which will boast combined sales of €170bn and be valued at €41.4bn. It will have a 400,000-strong workforce and total vehicle sales of 8.7 million. The merged entity will sell a portfolio of brands "covering the luxury, premium and mainstream passenger car segments" and is expected to get around 90% of its revenue from Europe and North America.

While the deal is being called a "merger of equals", the way it is structured means that "PSA Group was essentially the buyer and Fiat Chrysler the seller", says Bloomberg's Anthony Palazzo. So it's no surprise that the final terms suggest that Fiat's shareholders are getting a premium of 26%. Still, although PSA's CEO Carlos Tavares will be overall CEO and PSA "will appoint six of the 11 initial directors", Fiat's Agnelli family "will be the biggest shareholder in the new company", so the question of who is in charge remains cloudy.

Car deals rarely work

"The history of automotive mergers isn't a happy one," says Bloomberg's Chris Bryant. Daimler's and Chrysler's "failed marriage" is a "textbook example" of the culture clashes that supposed "mergers of equals" can spawn. Still, shareholders should take heart from the fact that Peugeot and Fiat "seem much closer philosophically", with both sets of managers "firmly committed to creating value for shareholders" and determined to find a place in an industry dominated by the impending "demise of the combustion engine". Not so fast, say Nick Kostov and Ben Dummett in The Wall Street Journal.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

The companies will "need approval from both US and European regulators", including for their financing operations. Indeed, Peugeot's involvement with the Chinese firm Dongfeng, which has already been forced to reduce its stake in the merged firm to 4.5%, could prove to be a "red flag" for the Committee on Foreign Investment in the US, "which is likely to review the merger proposalat a time of trade tensions between the USand China".

Still, shareholders have grounds for optimism, say Lisa Jucca and Christopher Thompson for Breakingviews. The two firms have been forced to rule out factory closures to placate politicians, but plans for €3.7bn of synergies look "credible". The idea is to save money by "combining production platforms, consolidating electric-vehicle investment and using scale to squeeze suppliers". Carlos Tavares has already worked his "integrational magic" at Opel, which Peugeot took over in 2017, achieving most of the targeted synergies without closing plants.

Boeing runs out of runway

Boeing is to suspend production of its grounded 737 Max planes next month, report Leslie Josephs and Phil LeBeau for CNBC. The aerospace giant had raised expectations that the jet would be back in the air by the end of the year, but America's Federal Aviation Administration (FAA) is still not satisfied that the plane is safe.

Boeing's response to the 737 Max crisis has been an "ugly mixture of remorse, evasion and swagger", says The Economist. Now its strategy of asserting that everything will be back to normal soon has "run out of runway". The consequences will be significant. At least one million people work for Boeing and its suppliers. Airlines have built their strategies for the coming decade around orders for the 737 Max. Passenger plane-making is a duopoly between Boeing and Europe's Airbus. That raises the suspicion that "lack of competition" is allowing it to get away with "poor behaviour". It's time for CEO Dennis Muilenburg to go.

It is difficult to find an apt historical precedent for the scale of Boeing's current crisis, says the Financial Times. Volkswagen's diesel emission-cheating scandal springs to mind, but the VW scandal was "not directly related to the safety of its customers" and did "not result directly in anyone's death". Two plane crashes have cast doubt over Boeing's "competence in designing safe aircraft", which should be its be-all and end-all. The difficult task ahead is to rebuild a company culture that values "engineering excellence" over short-term shareholder returns. "Boeing will survive this crisis it needs to ensure trust in its products does too."

City talk

John Fallon, the boss of education publisher Pearson, has survived so many profit warnings that we dubbed him "Teflon John", saysLex in the Financial Times.Yet now he has announced his departure. Since Fallon started in 2013, shareholders' returns have been "a negative 29%". Fallon focused on cutting costs, but lacked a bigger vision. "Education is a valuable commodity" and Pearson's exams and training businesses could yet contain the "seeds of greatness". Hopefully his replacement is equal to the challenge.

A report that lifts the lid on a culture of shoddy practices at housebuilder Persimmon "makes for grim reading", says Ben Marlow in The Daily Telegraph. It finds the builder guilty of "systemic nationwide" fire-safety failures, while the cost of correcting structural problems unearthed in thousands of houses could "run into the tens of millions". No wonder the firm buried the report on its website.

Swiss Drugmaker Novartis has come up with a novel way to distribute the world's most expensive drug,says Denise Roland forThe Wall Street Journal. Zolgensma is a one-shot treatment for spinal muscular atrophy, a deadly genetic disease. Yet supplies are limited and the drug costs $2.1m. Companies can distribute as-yet unapproved treatments to seriously ill patients for free, but such is the demand in Europe that Novartis has resorted to a lottery-style rationing that sees eligible patients entered into a draw every two weeks; the lucky winners get a potentially life-saving treatment. Novartis says that a group of bioethics experts advised it that it was too difficult to follow the usual approach of drawing up "complicated criteria" to determine who gets treated.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri