Fiat/Chrysler Revisited

It’s been over two years since Fiat acquired a 35% stake in Chrysler, and 3 months since it acquired its 51% controlling stake. As you may recall from my earlier posts, I was (and remain) skeptical that this deal would succeed due to the challenges associated with deriving value from Chrysler, and integrating it into Fiat’s global operations (see Appearance on Cavuto, Now Introducing Fiat/Chrysler, Can Fiat Pull it Off, Is Fiat Nuts?).
Given the recent downgrades of Fiat’s debt by Fitch and Moody’s, the ratings agencies increasingly seem to agree with my opinion. Here’s a recent article from The Detroit News that discusses some of the reasons why Fitch downgraded Fiat to BB from BB+, outlook negative, earlier this month (see Fitch Downgrades Fiat Over Chrysler).
While the agency acknowledged the marriage of the two companies should ultimately lead to increased sales and greater economies of scale, it expressed concern about the challenge of integrating a still-struggling Chrysler with Fiat when both companies remain under tremendous pressure.
“The current ratings are based on Fiat’s standalone credit profile, but incorporate heightened short-term risks for Fiat from its combination with Chrysler LLC in an increasingly challenging environment for the group,” said Fitch analyst Emmanuel Bulle, citing continuing softness in the European and American car markets. “Chrysler has a weaker credit profile than Fiat, and sustained benefits to Fiat from this deal should only accrue in the medium to long term.”
As I recognized in my earlier posts, there are some strategic reasons this acquisition makes sense, including, as the article states:
“Chrysler’s technology, product range and geographic diversification have become central to Fiat’s strategy…”
But it is important to remember that, even in the best of circumstances, acquisition integration is difficult. Lingering weakness in the automotive sector and broader macroeconomic environment make it even more challenging.