May 30, 2019 / 3:19 PM / a year ago

Cox: Merger of equals is French expletive

PARIS (Reuters Breakingviews) - When two lovers announce plans to marry, to have and to hold and share their lives in equality and mutual respect, it’s normally cause for festive celebration. In business, where a so-called merger of equals binds two parties to communal goals and interests, it’s much the same.

French President Emmanuel Macron and Italian Prime Minister Giuseppe Conte shake hands at the end of a joint news conference at the Elysee Palace in Paris, France, June 15, 2018. Ludovic Marin/Pool via Reuters

That’s why trumpets sounded to fete the latest corporate couple to announce their plans to walk down the aisle: Fiat Chrysler Automobiles and Renault. The French group is next week expected to officially accept the Italian-American carmaker’s proposal. Like all equal partnerships, their 33 billion euro union envisions a 50:50 share of assets and board seats, and a management structure in which Fiat Chrysler contributes a chairman and Renault the chief executive.

But like so many human marriages that begin happily, those involving companies don’t always succeed. The absence of a dominant party may even make such arrangements more difficult. That’s because the choice to pursue a merger of equals is often taken to appease constituents whose interests may diverge from others in the wedding party - particularly governments, family shareholders and founders.

France seems to have a larger distribution of such co-equal corporate relationships than, say, Germany or the United States. That’s probably a reflection of the state’s enduring influence over Gallic capitalism. Many have struggled or failed. To prove the exception, Fiat Chrysler and Renault’s leaders need to understand and avoid the mistakes of previous corporate nuptials.

Appeasing French President Emmanuel Macron’s government was a key factor in the Italian-American carmaker’s proposal. The company controlled by the Agnelli family has pledged to pay a special dividend worth 2.5 billion euros to its shareholders, thus reducing its equity value to within parity of Renault’s. In a less restricted market, Fiat Chrysler would probably have lobbed that money at Renault shareholders in return for control of the combined group.

The two carmakers have other factors in common besides stock-market value. Both are pipsqueaks in a contest that pits Western car manufacturers against technology giants awash with cash and a Chinese industry determined to rule the roads. They face a future where the rising cost of hydrocarbon emissions consigns the combustion engine to the museum, and where humans yield their steering wheels to algorithms. Together, Fiat Chrysler and Renault – and maybe eventually partners Nissan Motor and Mitsubishi Motors – stand a better chance.

Culturally, they’re similar too. The elegant city of Turin, where Fiat Chrysler is based, feels more French than Italian. Rome is twice as far away as Lyon. The local version of Italian spoken by Gianni Agnelli – grandfather of current Chairman John Elkann - even sounds French, with its “erre moscia”, or soft r’s. It’s not hard to see how Elkann, who was educated in Paris, hit it off with aristocratic Renault Chairman Jean-Dominique Senard. The 23-year age gap between the two also makes a competition for dominance less likely.

While two men in bespoke suits do not make a single global corporation, comity at the top of Fiat Chrysler and Renault is an auspicious start compared to previous combinations conceived as mergers of equals. Lafarge’s deal with Swiss cement rival Holcim was another trans-alpine fusion. Announced in 2014, the $44 billion transaction was also struck at parity, with a shared board, and with Lafarge’s boss designated CEO and Holcim providing the chairman.

Cracks quickly appeared. Lafarge’s results deteriorated and its shares sank. Bruno Lafont, Lafarge’s CEO, annoyed his frugal Swiss counterparts by flying a private jet around the United States on a roadshow. To save the union, and preserve $1.5 billion in synergies, the terms were renegotiated to give Holcim owners a cash dividend. Lafont rescinded his title to Eric Olsen, an American Lafarge executive.

That saved the deal from falling apart before the formal exchange of vows – a fate that had recently befallen the proposed tie-up between French ad firm Publicis and Madison Avenue rival Omnicom. But the cement saga didn’t end there. Not long after consummation, Olsen was forced to resign amid a probe into whether Lafarge had made payments through intermediaries to armed groups, including Islamic State, in Syria.

The former CEO was cleared in March. In what appeared to be a rebuke to the board, the French judges absolving him agreed that he “had been the subject of an internal destabilisation campaign as a U.S. citizen”. They effectively accused Holcim’s directors of hanging the Lafarge executive out to dry. Shareholders haven’t fared well either: LafargeHolcim shares have lost a third of their value since the merger closed in October 2015, much worse than rival HeidelbergCement’s 8% decline.

Though LafargeHolcim may be the nastiest example, there are more botched cross-border mergers of equals involving French partners. Essilor and Luxottica have been battling over who should be the chief executive since the eyewear groups combined last year. During the squabbling, which has temporarily been quieted by an agreement to conduct a search for an external CEO, the maker of Ray-Ban glasses and Varilux lenses has lost a fifth of its value.

TechnipFMC has returned a negative 36% to shareholders since the oil-services firms merged as equals in 2017, underperforming rival GE-Baker Hughes. Moreover, by designating Paris just one of three headquarters, alongside Houston and London, much of the decision-making is now done outside of Technip’s tower in the French capital’s La Defense district, says a Parisian banker who no longer counts the company as a domestic client.

Yet these examples pale in comparison with the disastrous 2006 fusion of Alcatel and its American telecom equipment rival Lucent Technologies. While Alcatel shareholders got 60% of the combo, Lucent boss Patricia Russo became CEO and the board was evenly split. Her feuding with French Chairman Serge Tchuruk, amid huge losses, led to both leaving after two years. New management cleaned up the mess, which eventually disappeared into the maw of Nokia.

Fiat Chrysler and Renault have more going for them than the ill-fated telecom-equipment group. But the challenges the car business faces are similarly existential to what the leader in fixed-line DSL networks experienced. Any one of these forces could spell extinction: An end to the fossil-fuels era, the advent of mobility as a service, disruptive technologies and the rising capability of Chinese rivals. Infighting over who gets what job in a marriage of equals would probably guarantee an equally ugly outcome.


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