Fiat Chrysler proposed on Monday to merge with France’s Renault to create the world’s third-biggest automaker, worth $40 billion, and combine forces in the race to make electric and autonomous vehicles.
The merged company would reshape the global industry: it would produce 8.7 million vehicles a year, leapfrogging General Motors and trailing only Volkswagen and Toyota.
Shares of both companies jumped on the news of the offer, which would see each side’s shareholders split ownership in the new manufacturer.
Fiat Chrysler’s offer comes at a key moment for Renault. The French manufacturer had wanted to merge fully with Nissan, but those plans were derailed by the arrest of boss Carlos Ghosn on financial misconduct charges in Japan.
Now, questions are growing over the Renault-Nissan-Mitsubishi alliance, which together make more passenger cars than any one company. While Fiat Chrysler says the merger with Renault would accommodate the alliance and lead to savings for them, it is unclear how the Japanese companies might react in the longer term to being tied to a much larger partner.
Automakers have collaborated more in recent years to build their technological capabilities in developing electric cars, self-driving vehicles and in-car connectivity. Regulators, particularly in Europe and China, are pushing automakers to produce electric vehicles and meet tougher climate change regulations, pressure that only grew after scandals over the amount of pollutants emitted by gas and diesel-powered engines.
A deal would save five billion euros ($5.6 billion) a year for the merged companies by sharing research, purchasing costs and other activities, Fiat Chrysler said. It promised the deal would involve no plant closures, but it didn’t address potential job cuts.
The companies are largely complementary: Fiat Chrysler is stronger in the U.S. and SUV markets, while Renault is stronger in Europe and in developing electric vehicles. Analysts say both companies are weak in China, which is now the world’s largest auto market.
Together, they would be worth almost 37 billion euros ($40 billion). Shareholders of Fiat Chrysler, which includes the holding company of the founding Agnelli family with a 29% stake, would get a 2.5 billion-euro ($2.8 billion) special dividend to make up for an imbalance in company values.
“This operation will bring benefits to both countries,” Fiat Chrysler Chairman John Elkann told reporters in Italy, noting that it had been 10 years since Fiat’s takeover of bankrupt Chrysler, in exchange for small-car technology and management know-how.
The car market has shifted dramatically in the meantime, with Fiat Chrysler abandoning small cars in the United States in favor of SUVs.
Analysts at financial firm Jefferies said it was “hard to disagree with the logic” of the deal, as there is a strong fit in the markets each company covers and the brands they offer.
“The elephant in the room is who will run the entity,” analysts Philippe Houchois and Himanshu Agarwal wrote in a note to investors.
Mergers of equals can be difficult to manage over questions of who gets the top leadership positions and which brands are promoted and invested in most. A tie-up between Daimler and Chrysler in the 1990s was billed as a merger of equals, but it eventually collapsed amid cultural differences and recriminations.
Investors were nevertheless enthusiastic about Fiat Chrysler’s plan, pushing the company’s shares up 8% and Renault’s 12%.