How Fiat Chrysler’s Proposed Merger With Renault Crashed
The deal was doomed by the collision of cold financial logic with politics and pride, leaving mistrust and annoyance on all sides. ‘It’s about trust, and that’s the problem here.’
PARIS—Four days after Fiat Chrysler Automobiles NV proposed a merger to France’s Renault SA, RNO -6.41% a French government official phoned the Italian-American company to say France wouldn’t be forced into any deal.
Bruno Le Maire, France’s finance minister, was irritated to read in a French newspaper that Fiat Chrysler considered its proposal “non-negotiable.” The minister, who was attending the exclusive Bilderberg meeting of global business and political leaders, spoke with Fiat Chrysler chairman John Elkann and said that to the French state, all proposals were negotiable.
The phone call was a sign that Mr. Elkann’s bold plan to shake up the global car industry faced more hurdles than he had bargained for. In addition to his would-be merger partner Renault, Mr. Elkann found himself having to assuage national sensibilities in France as well as Japan, where Renault’s longtime partner Nissan Motor Co. NSANY -3.29% was annoyed at not having been informed earlier.
On Wednesday night, the Fiat Chrysler-Renault merger collapsed as the cold financial logic of deal-making collided with politics and pride, leaving mistrust and annoyance on all sides of the 10-day tangle.
The fragmented car industry is struggling to transform itself to respond to rising pressures of global competition, heavy investment needs and new technology.
Fiat Chrysler’s proposal was intended to give both companies the scale to cope with slowing sales and to meet the industry’s biggest challenges: making more efficient, low-emission engines, wringing profits from electric vehicles and bringing self-driving, internet-connected vehicles to market.
This account was based on interviews with participants and advisers in Europe, the U.S. and Japan.
Mr. Elkann, the New York-born scion of one of Europe’s most famous business families, seized an opportunity to wed Fiat Chrysler to a French rival, in a quest to build a global heavyweight. But the bride was already in a committed relationship, which a watchful parent wanted to preserve.
The French state was open to a deal, but it saw no reason to rush in or to jeopardize Renault’s 20-year-old alliance with Nissan. The Japanese auto maker felt bypassed and threatened by Mr. Elkann’s surprise move. The Paris government also raised detailed demands to protect national prestige.
When Paris demanded more time, to allow for talks with Nissan, Mr. Elkann canceled his offer in frustration over the growing role of French politicians in his deal.
The merger would have created the world’s third-biggest car maker by production, behind only Toyota Motor Corp. and Volkswagen AG .
Its failure, for now, leaves Fiat Chrysler in play, its controlling family shareholder having shown they want a merger that would dilute their stake. Mr. Elkann has long wanted to reduce the exposure of his Agnelli-Elkann family to the car industry and diversify their multibillion-dollar investments.
In the past year, the 43-year-old Mr. Elkann has emerged from the shadow of Fiat Chrysler’s charismatic former chief executive Sergio Marchionne, who died unexpectedly last July. Mr. Elkann approached Renault this spring after its own larger-than-life CEO, Carlos Ghosn, was forced to resign after being charged with financial crimes in Japan.
The disappearance of Messrs. Marchionne and Ghosn may have opened the door to merger talks. But the loss of their political savvy, particularly of Mr. Ghosn’s experience handling Renault’s thorny relationship with Nissan, may have doomed the talks.
For years, Messrs. Marchionne and Ghosn had discussed the possibility of a merger, according to people close to the talks. But Mr. Marchionne saw an important sticking point: Before any tie-up, Renault needed to resolve tensions with Nissan over the structure of their alliance.
Nissan executives had long seethed over the fact that the company’s 15% stake in Renault didn’t come with voting rights. Renault, the smaller of the two companies, had 43.4% of Nissan and full voting rights.
Mr. Ghosn was trying to move forward on a plan to create a holding company for all of Renault and Nissan’s shares, essentially merging the longtime partners. That drew a backlash from a group of Nissan executives who secretly contacted Japanese prosecutors with allegations about financial wrongdoing by the longtime Renault and Nissan leader. Mr. Ghosn, who denies the allegations, was jailed. He is currently free on bail in Japan.
Mr. Ghosn’s fall deprived the French state of an intermediary who had learned over decades to navigate corporate culture in Japan, where consensus drives decision-making and direct confrontation is usually avoided. The auto titan’s arrest also left Renault rudderless, eventually pushing its stock market value to multiyear lows.
Mr. Elkann sensed an opportunity. In May, the Agnelli heir contacted Jean-Dominique Senard, who had recently been appointed to succeed Mr. Ghosn as chairman. Since Renault and Fiat had been in talks about a host of common projects, Mr. Elkann said, why not discuss a tie-up? The move fired the starting gun for the men to reach a tentative deal.
Renault’s general shareholder meeting was only one month away, and the pair hoped to push a deal through Renault’s board before then.
On May 24, Mr. Senard met with Mr. Le Maire, who as finance minister oversees France’s industrial holdings, including in Renault. Mr. Le Maire was a former presidential candidate who graduated from the École Nationale d’Administration, the academy of France’s close-knit elite.
Mr. Senard revealed that he had been negotiating a merger with Fiat Chrysler and that he expected to receive an offer soon. Mr. Le Maire said he would examine the offer after it arrived, according to a French official.
The minister also told Mr. Senard that any deal needed to fit within the framework of Renault’s alliance with Nissan and Mitsubishi.
On May 26, Mr. Elkann sent a letter to Renault proposing the 50/50 merger, after news of the talks began to appear in media reports. By the time Mr. Senard sent an email that evening to Nissan Chief Executive Hiroto Saikawa, informing the Japanese auto maker of the negotiations, the sun was already rising in Japan.
Nissan was blindsided. Mr. Saikawa, known in Japan for his enigmatic body language, put on a brave face, publicly describing the talks as “something positive.”
Privately, Nissan executives fumed over what they perceived as a betrayal. Their reticence about saying so led Fiat Chrysler to believe Nissan wouldn’t be a problem. In the days that followed, Nissan’s carefully expressed reservations were essentially lost in translation.
“The idea you would negotiate a merger without speaking with your 20-year partner is absolutely extraordinary,” a person close to Nissan said. “It’s about trust, and that’s the problem here.”
Days later, Mr. Senard flew to Tokyo and dined with Mr. Saikawa, seeking to reassure him about Fiat Chrysler’s proposal, according to people familiar with the matter.
Nissan felt it deserved a place at the negotiating table in any deal involving its longtime partner, according to people close to the company. A patchwork of contracts and agreements governed ties between Nissan and Renault, determining how they share everything from vehicle platforms to high-tech patents, said people familiar with these deals. Those agreements might need to be renegotiated in the event of a merger, some of the people said.
Underlying those agreements is the so-called Restated Alliance Master Agreement, which lays out the foundation for cooperation and the rights of the partners. The contents of the roughly 30-page document are a closely guarded secret to all but a handful of executives and support staff.
On Monday, Mr. Saikawa broke his silence on the merger, saying it “would require a fundamental review of the existing relationship between Nissan and Renault.”
In Paris, the comments had a chilling effect. “We had the statement from Mr. Saikawa who wasn’t expressing support for the operation. Quite the opposite,” one French official said.
While the French government worried about mixed signals from Japan, Fiat Chrysler read them in a positive light. Mr. Elkann, determined to secure agreement for his merger with Renault, believed Nissan was open-minded about it and that details affecting Nissan could be sorted out later.
Mr. Saikawa privately told Mr. Senard that Nissan’s representatives at Renault would be unlikely to support the merger at a board meeting Tuesday to approve the deal.
The day of the meeting, Patrick Pelata, Renault’s former chief operating officer, sent 10 board members an email warning them that a merger would put the French auto maker’s relationship with Nissan in jeopardy.
When the board convened hours later, the French state and Mr. Elkann were still negotiating over the government’s demands for job guarantees and other measures to safeguard Renault’s future in France.
Instead of confronting the major hurdles facing the deal, the Renault board discussed the findings of an internal investigation into Mr. Ghosn’s spending at the helm of the alliance.
The meeting ended with neither a vote nor any mention of Nissan’s stance on the merger, according to people familiar with the matter.
The next day, Fiat Chrysler thought it had won the French state’s support for the deal. It offered several concessions to meet Paris’s concerns, including guaranteed representation for France on the combined company’s board.
When the Renault board convened for a second time, at 6 p.m. on Wednesday, the Japanese question hovered over the discussion.
Renault’s chief lawyer explained the concessions that Fiat Chrysler had agreed with the French government. Directors quizzed Mr. Senard at length.
The meeting paused at 9 p.m. while the government’s representative, Martin Vial, tried to phone Mr. Le Maire, the finance minister. The pause lasted two hours. Mr. Le Maire proved hard to reach.
The waiting Renault directors checked emails, drank coffee and ate pizza and sushi brought to them by security guards. At 11 p.m. Mr. Vial finally returned, looking somber. Mr. Le Maire had told him there was a problem.
The rest of the board soon knew it, too. The two directors from Nissan said they would stick to their intention to abstain.
The French government’s long experience of dealing with Nissan told it that an abstention at this stage spelled trouble. Unless the Japanese would commit to a yes vote, their polite response could later turn into opposition.
Mr. Vial took the floor, saying the government saw many positive aspects to the proposal, but that Renault’s Japanese alliance was “très importante.”
The finance minister was leaving for Tokyo the next day, Mr. Vial said. The government wanted a delay of five days while Mr. Le Maire discussed the merger with the Japanese government.