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A new start for Chrysler — but the same old problem

Rick Newman
·Senior Columnist
The Chrysler logo is shown on a new Chrysler 200 on the showroom at the Massey-Yardley Chrysler, Dodge, Jeep and Ram automobile dealership in Plantation, Florida October 8, 2013. REUTERS/Joe Skipper

It might be the start of a new era for Chrysler. Or maybe just a repeat of earlier troubles.

The recent agreement allowing Fiat to purchase all remaining shares of Chrysler brings an end to a long corporate drama that, in some respects, began decades ago. Fiat, of course, bought Chrysler out of bankruptcy in 2009 in a complicated deal that saved the otherwise doomed automaker. As part of that deal, a trust representing unionized Chrysler retirees obtained a 41.5% stake in the company, which the Italian automaker has now agreed to purchase. Since the two sides had been squabbling over price, the deal seems like a win for Fiat, which will pay the trust $4.35 billion for its shares — less than analysts had expected.

For Fiat and CEO Sergio Marchionne, the deal gives the company a now-profitable U.S. division and global scale. Fiat is in the midst of a long turnaround, and with its home market just beginning to emerge from a double-dip recession, the company has barely turned a profit during the past few years. A rejuvenated Chrysler, free of old debts shed during bankruptcy, should contribute strong cash flow that helps Fiat get back on its struts in Europe. That’s why Fiat’s shares jumped more than 10% on the news of the finalized deal.

A familiar position

But Chrysler is in a familiar and perhaps uncomfortable position — yoked to a European automaker because it lacks the heft to compete effectively on its own. Even though Fiat-Chrysler enjoys better purchasing power than either automaker would have independently, that may still not be enough. “Only investors who are willing to accept the risks of a highly leveraged turnaround situation in an extremely competitive, capital-intensive, cyclical industry should consider investing,” Richard Hilgert of Morningstar wrote in a recent note.

Fifteen years ago, Chrysler merged with Daimler-Benz in a “merger of equals” (which turned out to be more like a German takeover) that had several parallels with the Fiat deal. In both cases, for instance, European management moved into the executive suite at Chrysler, rather than the other way around. And both deals were meant to create the obligatory synergies by blending the best of European and American technology.

There are differences, as well. The 1998 Daimler deal valued Chrysler at $36 billion. All told, Fiat has paid just $6.3 billion for 100% of Chrysler, including a series of purchases going back to 2009, when the company’s value was depressed. The terms of the latest deal value Chrysler at around $10.5 billion today — 71% less than its value at the time of the Daimler deal.

Chrysler clearly hopes the Fiat deal goes better than the one with Daimler, which basically ended in divorce. The luxury German automaker and its brash American partner turned out to be a poor fit, with few of the expected synergies materializing. In 2007 Daimler sold Chrysler to a private-equity firm for less than one-third of what it paid. Then the recession hit, putting Chrysler on the path to bankruptcy.

The intervention

Fiat’s intervention in 2009 clearly saved Chrysler, since the Obama administration had planned to let the automaker die if no buyer emerged; unlike General Motors, Chrysler wasn’t seen as too big to fail. It was a bold gamble by Marchionne, who had failed to line up other partners able to give Fiat the scale he felt it needed.

But even though Chrysler is now profitable, it’s still in the vulnerable position it has been in on and off for four decades — a middleweight going tire-to-tire with heavyweights. A fully merged Fiat-Chrysler will still only be the sixth- or seventh-largest automaker in the world, behind Toyota, Volkswagen, General Motors, Ford, Nissan and possibly Hyundai. Profitability matters more than size, of course, but profits in the car business go to firms best able to spread costs across the fewest number of global platforms. Neither Chrysler nor Fiat alone had a large enough footprint to match the efficiency of the big players.

One advantage Chrysler may have: It has long been accustomed to the underdog role, and has always found ways to survive. Chrysler’s first brush with bankruptcy was in 1979, when it secured a $1.5 billion bailout from the U.S. government that kept it out of the ditch. The automaker swerved between the fast and slow lanes for the next 30 years. Chrysler developed innovative vehicles such as the minivan, and rode the SUV boom of the 1990s to huge profits, but also struggled whenever rising gas prices drove buyers away from its large vehicles. As the auto market became increasingly global, Chrysler lacked a foothold in China, as well as the small cars popular in Europe and compelling vehicles in its changing home market.

The Fiat-Chrysler strategy seems sound. As cash from Chrysler helps Fiat recover, Fiat’s small-car technology will help Chrysler expand its own lineup where it’s weakest. New models coming to the United States from Fiat’s Alfa Romeo division will bring some pizazz to Chrysler’s home market, aiding both brands.

But Hilgert points out the global industry is awash in overcapacity, which could generate intense pricing pressure that hurts smaller automakers more than big ones. And both Fiat and Chrysler still have a lot of work to do revamping old models. For now, however, the Italian-American hookup seems to be generating a glow on both sides of the Atlantic. Better a shotgun wedding than none at all.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.