When Fiat exercised a call option on part of the pension fund’s stake early last year, Fiat’s proposed price valued Chrysler at around $6 billion. UBS analysts valued the U.S. automaker at around $9 billion at the time. A valuation range of from $9 billion to $12 billion for 100% of Chrysler seemed to be the analysts’ consensus before Sunday’s deal was announced.
Fiat had exercised its options to acquire the UAW-controlled stock on three occasions, but the company and the union never agreed on a price. A lawsuit to determine the price of the options was dismissed as part of the buyout agreement.
The union had forced Fiat to file for an initial public offering (IPO) last September, and it wanted the company to sell 16.6% of the stock. Fiat halfheartedly filed to sell just $100 million in stock sometime this year.
But the UAW had Fiat over a barrel. The company’s business in Europe has fallen apart as the economy has worsened, and Chrysler sales were the sole reason the Italian carmaker continued to post profits. Fiat’s management knew it, investors knew it and so did the union. Fiat wanted to pay less than the union’s stake was worth, and the union said it was not interested in selling at that price.
Fiat’s problem now is how to compete with much larger peers like Ford Motor Co. (NYSE: F) and General Motors Co. (NYSE: GM). Chrysler has fallen behind Toyota Motor Corp. (NYSE: TM) and remains barely ahead of Honda Motor Corp. (NYSE: HMC) in U.S. new car sales. In the fast-growing Asian markets, Volkswagen has a big head start on the Italian company as well.
Maybe Fiat paid more than it wanted to for Chrysler, but it certainly did not pay too much. When you are dying of thirst, how much would you pay for a glass of water? It was a question of survival for Fiat. The company has bought itself some time to come up with a strategy for competing in China and taking advantage of the slowly improving European economy. And time is at least as valuable as water.