Sandy Leeds Market Update: I'm Not Convinced Fiat Can Save Chrysler
By Sandy Leeds, senior finance lecturer at McCombs
1. Fiat has never been successful in the US. Regardless of the fact that management has turned Fiat around in Europe, you really need to be skeptical about their potential for success here.
2. The Administration is excited about the technology of Fiat being shared with Chrysler. While Fiat has improved the quality of their product, I'm not convinced that the American consumer will associate quality with Fiat.
3. Even if you assume that the deal with Fiat happens, AND you assume that Fiat has great technology, it will take a significant amount of time before this impacts Chrysler.
4. In 2001, GM negotiated a European alliance with Fiat. GM ended up paying $2 billion to get out of that deal.
What If the Fiat Deal Doesn't Happen
1. The deal is VERY likely to happen.
2. Some people still feel that Chrysler should merge with GM and they should focus on being the "big car" manufacturer. It's really hard for me to understand the rationale of "crap + crap = golden egg." The last time I heard that, I was looking at a CDO.
3. If the Fiat deal doesn't happen, would the Obama administration really let Chrysler liquidate? Doubtful, but a pleasant thought all the same.
4. Closing Chrysler would eliminate 14% of US light vehicle manufacturing capacity.
5. It's hard to understand how Chrysler will get rid of $9 billion of debt (as the government wants them to do). Secured lenders will be better off seizing assets in bankruptcy.
6. Most of the unsecured debt is held by JPM, C and GS.
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