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January 24, 2005

More Trouble for GM

Won't American car companies ever learn? Heaven is a place where the English are the Police, the Italians are the cooks, and the Germans are the mechanics. Hell is a place where the Germans are the police, the English are the cooks, and the Italians are the mechanics.

There may have been some American-Italian car partnerships that succeded, but I can't remember them. Chrysler spent hundreds of millions of dollars to build a few hundred specialty cars with Maserati back in the 80s. Now, GM is trying desperately to find a way out of its money-hemorrhaging deal with Fiat (the WSJ has a superb article, but you need a subscription).

The problem is a $2 Billion put option that Fiat holds - over GM's head - as part of the price of the 20% acquisition. Both companies have gotten killed in Europe:

According to the Journal:

The negotiations are coming to a head as GM, which paid $2.4 billion for a since-diluted 20% stake in Fiat's car unit in 2000, faces a possible cut in its credit rating. In its core market of North America, GM has been losing market share and been forced to cut production amid increased competition from Asian rivals such as Toyota Motor Corp. and Nissan Motor Co. If GM is forced to pay a hefty settlement to wriggle out of the put option -- or worse, has to acquire the Italian auto maker and its $10 billion in debt -- it could weigh heavily on an already burdened balance sheet...

When Mr. Wagoner negotiated the Fiat tie-up he also agreed to another clause -- the put. The agreement, which is valid between 2005 and 2010, gives Fiat the right to force GM to buy out all of the Italian company's car unit at a price to be negotiated. Fiat had insisted on including the put option as an insurance policy should its alliance with GM go awry, something which neither company considered likely.

Now, puts between companies aren't normal, but they're not unusual, either. Sometimes they can be added when one company is selling a division to another. When one Canadian telecom sold a division to another, it included puts, to be followed by calls. At other times, they're included to limit risk.

But GM might have been expected to smell a rat here. If "neither company considered [failure] likely," then Fiat shouldn't have insisted on it. Instead, they cheerfully went along, and are now looking at the unappealing possibility of litigating in the famously arbitrary Italian courts, a home field advantage for Fiat if ever there was one. Now, Fiat is using the put to hold up GM for cash it needs, while GM is trying to avoid shredding its balance sheet beyond recognition.

Things may have improved since Luigi Barzini wrote The Italians, but if you were GM, how eager would you be to test that thesis? And don't you wish that GM's CFO had a blog?

Posted by joshuasharf at January 24, 2005 07:16 PM | TrackBack
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