Saturday, February 12, 2005

GM's Fiat deal comes back to haunt it

By Tom Brown / Reuters

Copyright © 2004 Reuters Ltd. Click for Restrictions.

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DETROIT -- General Motors Corp. has been trying to slam the brakes on a deal that could see Fiat SpA's money-losing car arm Fiat Auto, rammed down its throat.

GM set the deal in motion itself, however. And analysts say it raises questions not only about a troubled industrial alliance, but about decision-making and strategy at the world's largest automaker.

For years now GM has extended its global reach -- and help cut purchasing and development costs by spreading them out over more volume -- by going after equity interests in companies like Japan's Isuzu Motors Ltd. and Suzuki Motor Corp..

"There was a general policy, it seems, of buying a minority interest in every troubled automaker all over the world," David Healy, an analyst with Burnham Securities, said of GM.

In March 2000, when GM bought 20 percent of Italy's Fiat Auto in exchange for 6 percent of GM's shares, it did something different than in other tie-ups, however. It also agreed to a "put option" under which Fiat could eventually sell its stake in Fiat Auto to GM.

"That's just dumb, and that's the best word you can use for it," Gerry Meyers, a University of Michigan business professor, told Reuters.

"I know for a fact they regret it," Meyers added. "I know the GM executives very, very well, and they're red-faced and just wish the devil they could get out of this thing without it costing them an arm and a leg."

Meyers, an auto industry veteran himself, once headed American Motors Corp.

The earliest date agreed for Fiat Auto's sale passed last week. And its parent -- which industry sources say is sorely in need of cash -- can now either demand that GM buy Fiat Auto flat-out or give it a large payment to go away.

"They're playing high stakes poker," said David Cole, head of the Center for Automotive Research in Ann Arbor, Michigan.

GM insists that Fiat breached the terms of the so-called "master agreement" between the two companies when it sold off a 51 percent stake in the finance arm of Fiat Auto.

GM spokeswoman Toni Simonetti reiterated that position this week. She also noted that GM had already written off its $2.4 billion investment in Fiat and said GM has ample legal protections in the master agreement in the event that GM and Fiat are unable to resolve their differences amicably.

"I think it's too soon to say this has all been bad for General Motors, because we don't know the outcome," Simonetti said. "There's been a lot of benefits derived from the partnership for both parties," she added.

Analysts are skeptical, however, saying the Fiat deal could put a big dent in GM's sheet metal, beyond the $2.4 billion write-down.

"OVER A BARREL"

"GM is over a barrel. It was a bad decision and all they can do is pay their way out of it," said Graeme Maxton of Autopolis, an auto industry consultant in Britain.

Under the terms of their deal, investment banks would determine what, if any, value there might be in heavily indebted Fiat Auto. But apart from some factories and its Ferrari and Alfa Romeo brands, analysts say Fiat Auto is worth little outside of Italy, where it is one of the largest employers.

"The fact is that Fiat (Auto) had been mismanaged for the best part of a decade," prior to its link-up with GM, Maxton said.

"I believe that at the time of the transaction it was very distant from the minds of all the principals that this (put option) would ever be invoked," Scott Sprinzen, chief auto industry analyst at credit rating agency Standard & Poor's, told Reuters.

"I would say it was not the best thought-out transaction in business history, and I don't think the current management of General Motors sees that differently," he said.

Jack Smith was GM's chief executive when it signed the deal with Fiat. His successor, Rick Wagoner, was GM's president.

"He was a rookie," Meyers said of Wagoner. "He got sucked into this grand global scheme thing."

S&P's rating on GM's massive debt is currently hovering just one notch above junk status. Sprinzen has warned that the outcome of the GM-Fiat dispute could prompt a cut below investment grade.