Fiat Shares -- Worth More Dead Than Alive?

 

NEW YORK (TheStreet) -- If Sergio Marchionne, CEO of Fiat Chrysler Automobiles  (FCAU), wants to be successful in convincing General Motors (GM) to merge, join an alliance or participate in a significant joint venture, he will have to overcome opposition from GM's top management and the automaker's directors. 

That's probably why he's been recruiting activist investors to pressure GM toward a tie-up with FCA, as was reported by The Wall Street Journal. But Marchionne likely is exploring other options and partners as well, which makes Fiat Chrysler's stock more attractive now than shares of GM. 

A GM spokesman, responding to the Journal story, said GM isn't opposed to partnerships. He offered GM's tie-ups with Honda (HMC) for fuel cells and Ford (F) for transmissions as examples. But GM doesn't need a full-scale consolidation and "all the baggage" that comes with it, the spokesman said. 

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In March, three activist hedge funds controlling 2.1% of GM's shares were successful in demanding the automaker spend $5 billion, more cash than it had been planning to spend for a share buyback and an increase in its common stock dividend. GM's willingness to compromise when pushed likely told FCA that the automaker is avoiding conflict with activists, which may have encouraged Marchionne to try. 

The earlier initiative by hedge funds against GM management sparked a 17% increase in GM shares through mid-March. GM's stock has since fallen to a price about 5% above where it stood prior to the hedge funds' demands. GM stock has disappointed investors since the company's initial public offering in 2010 following its 2009 bankruptcy and reorganization. Shares have risen only about 2.5% in nearly five years, compared with a 58% increase in the Dow Jones Industrial Average

FCA, by contrast, has rewarded investors handsomely since its initial public offering last October. Fiat and Chrysler merged following the latter's 2009 bankruptcy. In the past nine months, FCA common shares have risen 73% while the Dow has gained 8.6%. 

Fiat shares recently fell 1.5% to $15.35 Tuesday while GM shares rose 0.7% to $35.24.

To the investing public, FCA may appear worth more dead than alive, which means that shareholders agree with Marchionne's threshold assumption the company must undertake a merger or other big transaction with another automaker or capital-rich company like Google  (GOOG) or Apple  (AAPL). In the case of an automaker, FCA might disappear as a company and contribute valuable assets such as its Ram pickup truck business or its Jeep division to the merged entity. 

FCA's collaboration with a high-tech Silicon Valley company might confer the ability to create autonomous vehicles as well as infotainment products. Either way, an investment in FCAU shares predicated on the likelihood of a transaction offers more possibilities for a payoff than in investment in GM. GM, bogged down with safety investigations in the U.S. and slow sales in Europe, needs more time to prove that it can grow earnings consistently. GM is pointedly ruling out a significant merger, at least for the moment.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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