Mega Mergers: Is Volkswagen Chasing Fiat Chrysler?

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A German magazine is reporting that Volkswagen AG (VLKAY.PK) is apparently interested purchasing Italian automaker Fiat (FIATY.PK), according to Manager Magazin. It cited anonymous company sources, who supplied the information, as saying that Fiat really wants to focus on its Ferrari high-performance brand, “and quit its traditional automotive business,” Reuters cited Manager as saying. It didn’t go into further detail.

Fiat shares leapt at the news — about 5 percent — but the company later denied that Volkswagen had made an approach. “Fiat states that they have not held discussions with Volkswagen regarding a potential merger,” the company said on Thursday, in a statement. 

Strategically speaking, a merger between the two could make sense for Volkswagen, which has long been interested in Fiat’s Alfa Romeo brand (though Fiat CEO Sergio Marchionne has consistently refused to part with it), and VW could also use a big boost here in the U.S. — where Chrysler, Ram, Jeep, and Dodge all have well-situated dealer networks that Volkswagen could take advantage of.

However, on the downside, Volkswagen already has a portfolio of twelve brands including its heavy truck units. That’s a lot to manage, even for a company worth almost $120 billion; VW’s products run the gamut of its entry-level Skoda cars, to Lamborghini and Bentley, as well as Ducati, which was bought by Audi in spring 2012.

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At the end of March, Volkswagen had cash reserves of 18 billion euros (or $24.36 billion). Fiat Chrysler, as a whole, is valued at roughly half that, at 9.7 billion euros. A merger would also play an integral role in Volkswagen’s goal of moving 10 million units globally this year, and it plans on cutting costs and increasing efficiency at its namesake brand by 5 billion euros by 2017, Bloomberg said.

Reuters pointed out that VW CEO Martin Winterkorn said at the automaker’s March 13 annual news conference that VW “has no plans at present to expand the group through further acquisitions as it is focusing on integrating its 12-brand network.” Analyst Juergen Pieper, who spoke with Bloomberg, said that “Volkswagen has an urge to become the No. 1 global automaker, and an acquisition of that size would bring them to their target immediately.”

 “But real interest in Fiat as a whole is rather unrealistic and would entail many problems,” including Fiat’s struggles in Europe and potential antitrust issues in South America, he added.

Of course, those anti-trust issues would be global; both North America and Europe would likely require some hefty divestments before approving the merger. A handful of Chrysler brands could end up being left off the table altogether, would would essentially negate the purpose and benefit of the merger in the first place.

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