M&A ahead for wallflowers in Europe car shakeout
Publication date: 23 June 2009
Carmakers left on the sidelines of rapid change in Europe's auto landscape will eventually be forced into mergers and acquisitions even if they use alliances and partnerships to tackle immediate challenges.
As Magna fine-tunes its Opel deal and Fiat makes plans for Chrysler, analysts said that despite the industry's poor track record in M&A, the best way to achieve the major capacity cuts needed for profitability was consolidation.
"An alliance that allows you to reduce R&D, platforms, get greater economies of scale will certainly help longer term," said Nomura International analyst Michael Tyndall.
"But I don't think it really addresses the fundamental issue -- without pricing power you need scale to create value," he said, adding: "To me there's no magic trick, there's no alliance that allows two underperforming carmakers to outperform."
Analysts believe automakers facing an unprecedented sales crisis alone, will try in the short-term to shore up their defenses through joint ventures and technology partnerships as well as alliances -- like the Renault-Nissan model -- that allow them to share platforms and R&D costs.
But further ahead, this may not be enough.
French automaker PSA Peugeot Citroen may have recognized this. Underlining the depth of the crisis engulfing the industry, the group's new chief executive, Philippe Varin, said earlier this month that it -- and the Peugeot family which owns a 30.3 percent stake -- would be open to acquisitions or partnerships to boost its presence worldwide.
The French group -- number two in terms of sales in Europe in 2008, behind Germany's Volkswagen -- had hitherto shunned formal tie-ups in favor of technology partnerships with competitors. It has an electric car agreement in place with Mitsubishi Motor, and works with Germany's BMW on engines.
The French group has been repeatedly linked to Italy's Fiat by sector analysts, and speculation intensified after it became clear that Fiat, which wants to create a European auto giant, had lost out to Canada's Magna International in its bid to buy into General Motors Corp's Opel Unit.
M&A TRACK RECORD SHAKY
UBS analyst Philippe Houchois said that investors were looking for companies that could demonstrate how they could achieve better returns.
"What are they (Renault) going to do that they haven't done already?" he said, referring to the French carmaker extracting benefits from its alliance with Nissan.
But the company appears skeptical about the M&A route.
"All acquisitions that have taken place in the automobile industry have failed," Carlos Ghosn, CEO of both Renault and Nissan Motor Co, whose 10-year, cross-shareholding based alliance is seen as one of the success stories of the sector, said at a French national assembly hearing earlier this month.
Ghosn believes an alliance strategy whereby two groups maintain their autonomy but have a cross-shareholding -- is the best way to boost scale, save on duplicated costs and survive the crisis.
"The company's identity is fundamental for the motivation of people that make it. And if this company identity disappears and you feel as if you're working for someone else -- to really get the most from people is going to be hard work," Ghosn said.
Nigel Griffiths, chief automotive economist at forecasting and analysis group IHS Global Insight echoed Ghosn's comment.
"We've thought alliances were more likely to be the route to the future," he said. "Individual joint ventures, more like the PSA route, were looking more likely to be the case, because of all the failures we've seen," he added.
But the hubris of industry executives pulling the strings who simply decide on a target and insist on pursuing it, cannot be ruled out as a factor, said Griffiths.
"As (Fiat CEO) Mr Marchionne has demonstrated, people want to be in the driver's seat -- but because everybody wants to be in the driver's seat it makes it difficult to see full scale mergers," added Nomura's Tyndall.
But with carmakers struggling to shore up their balance sheets, once all other avenues have been explored, M&A may be all that is left.
"I think this year we'll see consolidation-lite and a second round when the level of desperation increases," said Tyndall. "Full scale mergers only happen when companies have no other options."
UBS's Houchois said that government support in terms of financing and incentives might be delaying dealmaking.
"The question is whether there is really planning going on," he said.
Source: International Business Times