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Sunday, June 7, 2009

Is Chrysler/Fiat the Second Coming of AOL/Time Warner?

One of my favorite books is Fools Rush In about the AOL/Time Warner merger. That was supposed to be a media/internet company that would redefine both industries. Instead, it turned into a debacle that derailed the careers of everyone involved. It ruined two giants in two different industries. Ultimately, it cost billions for shareholders and employees.

The merger was the brainchild of Steve Case of AOL and Jerry Levin of Time Warner. The list of problems with this merger is too numerous to list here. (so, I recommend you read the book) To sum up, the two principles were so enamored with the idea of putting these two giants together that they disregarded or never accounted for the plethora of problems that came about. One reason for this is that the deal was put together quickly. What should have taken months if not years to put together was put together in the span of weekends. Lawyers were given little time to make sure that the complex nature of the deal was done correctly.

One of the many problems that was overlooked was the problem of culture shock. Time Warner was an old school company. Its employees were expected to wear full suits and ties to work. Meanwhile, AOL was a company borne of the Silicon Valley. Its employees worked in a significantly less formal environment. They came to the office in khakis and short sleeve shirts. Because the deal was put together so quickly, the issue of culture clash was never even discussed. So, when the buttoned down Time Warner folks invariably had no trust for the informal AOL folks (and vice versa), no one had any idea how to merge the two cultures together. Another problem that was never resolved was that Time Warner contributed 80% of the total assets of the company while AOL contributed 80% of the market cap.

These were two of many problems borne of a deal that was put together far too quickly. Those involved wanted the deal to work so badly that they dismissed and ignored everything that didn't fit the idealized view of what the company would be. As such, the deal was put together rather haphazardly, and ultimately it totally fell apart.

Now we find out that Chrysler/Fiat is being put together in the same haphazard manner.

The Obama administration rushed an alliance between Chrysler LLC and Fiat SpA despite Chrysler's worries about Fiat's financial health and its willingness to share technology, according to internal company emails.

The emails show Fiat ignoring requests for documents and trying to change contract terms late in the talks. A Chrysler adviser at one point said the deal risked looking as if the U.S. auto maker and the Treasury Department, which helped broker the pact, were "in bed with a shady partner." In another note, an official referred to the Treasury Department as "God."


Chrysler's advisers told the company their Italian counterparts were refusing to provide sufficient financial information to evaluate the deal. A team sent to Fiat
headquarters in Turin, Italy, reported back on March 14 that "no financial due diligence ... has or can be performed."

An internal memo 13 days later from Chrysler's advisory team also said Fiat's "off-balance-sheet investments" in joint ventures around the world posed an economic risk and a political risk," including the appearance that "Treasury/Chrysler" was "in bed with a shady partner."

Eight days before President Barack Obama announced his support for the alliance in an April 30 speech, Chrysler officials were still bristling over what they considered Fiat's unwillingness to provide even basic information about its finances.

There are stark differences between the two mergers. AOL/Time Warner was put together out of an inflated sense of pride. In other words, the principles saw enormous potential in the new company and never once thought that anything could go wrong. This merger is being put together from an inflated sense of desperation. Deperation is likely an even worse emotion to drive a business deal than pride.

The similarities are both stark and dangerous. This deal is being rushed together nearly as quickly as the AOL/Time Warner merger. Once again, we see principles ignoring and dismissing potential problems. Besides the problems mentioned in the article, you can also bet that the two cultures, of Fiat and Chrysler, are likely very different. You can further bet that no one has figured out how these cultures will be fused together to make a successful company. You can further bet that they new management group of Fiat, the Unions, and the government haven't figured out how decisions will be made. Things like product lines, cost structures and factories have also likely not been hashed out. In much the same way, significant issues were never hashed out before the AOL/Time Warner merger was finalized.

There is one more very troubling similarity. The principle of Time Warner was Jerry Levin. Levin became famous when he turned HBO into a massive force by figuring out how to broadcast the Ali/Foreman fight from Zaire live. This sprung his star, however this was the last successful business endeavor in his career. Despite this, Levin continued moving up through the Time Warner family until he wound up head of the company when he fatefully met up with Steve Case. He was a visionary who lacked any business sense. (for instance Levin once created the very the ticker you now see as a standard on news and sports networks. Only when he created it, he couldn't figure out how to make it profitable)

We also now have the federal government which comes to this merger with a vision of what they want the auto industry to be. They also have absolutely no idea how to in a practical business sense make that vision a reality. Levin envisioned a company that would combine all the powers of media and internet into a collassus that couldn't be matched. He simply lacked the business acumen to make this a reality. Much like Levin in the case of Time Warner/AOL, the federal government now sees a car company that creates small eco friendly cars. They just lack the business acumen to make this a reality. Much of the problems that happened in the AOL/Time Warner merger happened because Levin had a vision but lacked the business savvy to make that vision a reality. That's exactly how the government is acting in this deal, all vision and no business savvy.

1 comment:

Anonymous said...

Even if it was the second coming of AOL/Time Warner, that's better than the first coming of DaimlerChrysler!