Fiat SpA: case study

FIAT SPA COMPARED WITH RENAULT, TOYOTA AND VOLKSWAGEN

USER

IF3108 Corporate Finance 12th December 2014

Alternative Assessment

Luca Borboni (140043441)

Index

Introduction…………………………………………………………………………………………………p.3

Chapter 1: “Company overview”…………………………………………………………………………p.4

1.1 Company’s history………………………………………………………………………… p.4

1.2 Range of products and geographical breakdown of Segments Units Volumes………..p.5

1.3 Sources of data……………………………………………………………………………….p.8

Chapter 2: “Strategic aspects”………………………………………………………………………… p.9

2.1 Assets………………………………………………………………………………………….p.9

2.1.1 Organic investments………………………………………………………………p.9

2.1.2 Spin-off Fiat S.p.A. and Fiat Industrial………………………………………….p.10

2.1.3 Fiat-Chrysler M&A………………………………………………………………..p.10

2.1.4 Fiat and RCS MediaGroup……………………………………………………....p.12

2.1.5 Other Acquisition and Disposals of subsidiaries………………………………p.13

2.2 Operations……………………………………………………………………………………p.13

2.2.1 Efficiency………………………………………………………………………… p.13

2.2.2 Layoff and plants closure………………………………………………………..p.14

2.3 Financing…………………………………………………………………………………… p.16

2.3.1 Right issue……………………………………………………………………….. p.16

2.3.2 Conversion of preferences and saving shares………………………………..p.16

2.3.3 Share repurchased……………………………………………………………… p.17

2.3.4 Debt issued……………………………………………………………………… p.17

2.3.5 Debt redemption………………………………………………………………… p.19

2.3.6 Dividend Policy……………………………………………………………………p.19

2.4 Management…………………………………………………………………………………p.20

2.5 Summary…………………………………………………………………………………… p.20

Chapter 3: “Performance and accounting ratio”………………………………………………………p.22

3.1 Methodology…………………………………………………………………………………p.22

3.2 Accounting ratios: analysis…………………………………………………………………p.22

3.2.1 Liquidity……………………………………………………………………………p.22

3.2.2 Profitability……………………………………………………………………….. p.24

3.2.3 Efficiency…………………………………………………………………………. p.26

3.3.3 Solvency…………………………………………………………………………. p.28

3.3.4 Leverage………………………………………………………………………… p.29

3.3 Limitation……………………………………………………………………………………. p.31

Chapter 4: “Performance and stock price”…………………………………………………………… p.32

4.1 Methodology………………………………………………………………………………... p.32

4.2 Performance analysis……………………………………………………………………… p.32

4.3 Limitations…………………………………………………………………………………... p.35

Chapter 5: “Consolidation of analysis: strategy and performance”………………………………....p.37

5.1 Strategy and Performance………………………………………………………………….p.37

5.2 Future strategies…………………………………………………………………………….p.38

References………………………………………………………………………………………………..p.41

3

Introduction

In this case study, I analyze the strategies followed by Fiat S.p.A. management and the company’s

performances. I examine deeply the most important and strategic relevant events between 2009 and

2013. Moreover, I compared Fiat S.p.A to its three main competitors: Renault, Toyota and

Volkswagen. This was fundamental for the analysis of both accounting ratios and stock price trend.

The report is organized in the following way:

Chapter 1, which provides a company overview

Chapter 2, which is focused on Fiat S.p.A. strategic aspects

Chapter 3, which analyzes Fiat S.p.A. and its competitors’ accounting ratios

Chapter 4, which examines stock prices trend

Chapter 5, which presents a consolidation of analysis

4

Chapter 1: Company overview

1.1 Company’s history

Fiat was founded at the end of 1800s, more specifically on July 11, 1899. In the following year, the

first plant was inaugurated and the total production reached 24 cars a year. In 1903, the company

was listed at Milan stock exchange for the first time. Moreover, it begun producing vehicles for goods

transportation, buses, trams, aircraft engines and its exports reached France, Grain Britain, Austria,

America and Australia. However, both the First World War and the Second World War had a

remarkable impact on the Fiat results and the range of its products. In fact, it was forced to convert

its industrial activity in order to support the war effort. Anyway, in 1923, the “Lingotto” factory was

inaugurated and represented the first example of industrialized production in Italy.

After the Second World War, Fiat played an important role in the Italian economic boom. The

car production grew six-fold, and there was a significant increase in the amount of employees thanks

to the opening of new plants all over the world. At the end of 1970s, Fiat became a holding company

when it spun off its various businesses into autonomous companies. During the 1990s Fiat tried to

conquer the emergent market in order to increase its global position and playing an important role in

the more competitive globalized world.

The first decade of new millennium was characterized by a profound crisis for the automotive

sector. Consequently, Fiat made some strategic partnership with other important players (e.g.

General Motors) and it went through a huge cultural change in order to refocus its business on the

automotive sector. After the financial crisis of 2008, Fiat begun the acquisition of Chrysler Group and

at the end of 2013 it owned 58.5% of the US firm. In 2010, the board of the company organized a

plan for the demerger Fiat’s capital goods business, creating a new group headed by Fiat Industrial

S.p.A.

5

1.2 Range of products and geographical breakdown of Segment Units Volumes

Fiat’s range of products was organized in three main sectors: Mass-Market Brand, Luxury Brand and

Components. In the first sector, there are several different brands. Fiat Professional (e.g. Fiat Doblò,

Fiat Fiorino), Lancia (e.g. Lancia Ypsilon and Lancia Delta), Alfa Romeo (e.g. Alfa Romeo Giulietta

and Alfa Romeo Mito) and Abarth. Moreover, all models with Fiat’s brand such as Fiat Palio, Fiat

500, Fiat 500L, Fiat Uno, Fiat Punto, Fiat Panda, Fiat Strada, Fiat idea, Fiat Linea, Fiat Scudo, Fiat

Bravo, Fiat Sedici. Thanks to the merger with Chrysler, Fiat group had also Chrysler’s brand such

as Chrysler (e.g. Chrysler 300 and Chrysler 200), Ram truck (e.g. Ram Promaster and Ram C/V),

Mopar, and Street Racing Technology. In addition to those, Jeep (e.g. Jeep Patriot, Jeep Cherokee,

Jeep Compass and Jeep Wrangler) and Dodge (e.g. Dodge Journey, Dodge Charger, Dodge

Avenger, Dodge Durango, Dodge Attitude, Dodge Challanger)

Furthermore, Mass-Market brand sector is based on four operating regions that deal with

development, production, and sale of passenger cars, light commercial vehicles and related parts

and services in specific geographical areas. The four main regions are the following: NAFTA (i.e.

North America, Canada and Mexico), EMEA (i.e. Europe, Middle Est and Africa), LATAM (i.e. South

and Central America, excluding Mexico) and APAC (i.e. Asia and Pacific countries). Therefore, it is

necessary to examine deeply the geographical breakdown of segment unit volumes. NAFTA is

composed by three main markets (see Figure 1): United States (84.13%), Canada (12.06%) and

Mexico (3.81%). In 2013, it is possible to observe a 6% increase of the amount of vehicle shipments

in the NAFTA region over the 2012 thanks to great shipments and sales of Ram 1500 pickup truck,

Jeep Grand Cherokee and Wrangler.

Figure 1: Breakdown by shipment s in NAFTA

6

On the other hand, Brazil was the most important market in the LATAM region in 2013 (see

Figure 2). In fact, it represented the 82.63% of shipments in South and Central America. The other

strategic markets are Argentina (11.68%), Venezuela (0.63%) and other countries (5.05%). Despite

the Group shipments in these areas decreased 3%, it maintained its leadership in the Brazil market

with a share of 22%.

The commercial performances in the APAC region show how the Chinese market is strategic

(see Figure 3). In fact, China represented more than half of total shipments in this geographical area.

Other important markets are Australia (22.70%), Japan (9.82%), South Korea (3.07%), while, other

countries weight for 9.20%. Moreover, it useful to underline that the vehicle shipments in APAC had

an increase of 58% over the prior year thanks to an extraordinary growth in the demand of Chinese

and Australian markets and Jeep, Fiat, Dodge are the most powerful brands in this region.

Figure 2: Breakdown by shipments in LATAM

:Figure 3: Breakdown by shipments in APAC

7

Finally, it possible to say that Italy (41.79%) is the main market in the EMEA region (see

Figure 4). Other strategic European countries are Germany (9.97%), France and U.K. (8.63), Spain

(3.45%) and Poland (2.10%). The rest of Europe and other countries had respectively a share of

12.58% and 12.85%. It is also important to underline that passenger car shipments had a significant

reduction in Italy and Germany over the previous year.

On the other hand, Luxury Brands designs, manufactures and sells luxury cars: Ferrari (e.g.

LaFerrari, Ferrari 458 Italia, Ferrari California, Ferrari F12 Berlinetta, Ferrari FF) and Maserati (e.g.

Maserati Quattroporte, Maserati Gibli and Maserati Gran Turismo). In particular, in 2013 Ferrari has

been the world’s most powerful brand1. Both Ferrari and Maserati had great performances in the US,

therefore it remained the most important market for these brands (see Figure 5).

1 “The Brand Finance Global 500” by Brand Finance

Figure 4: Breakdown by shipments in EMEA

Figure 5: Breakdown by shipments for Luxury Brands

8

On one hand, Ferrari maintained the production below the level of the prior year and reduced

the shipments in China in order to preserve its brand’s exclusivity and its results were very positive

in Middle East and Japan. On the other hand, Maserati had extraordinary performances in China

(i.e. it is its second larger market), Middle East and Pacific countries (excluding China) with a growth

in demand of 52%. Its results were excellent also in Europe, despite the economic crisis.

Finally, Components produces and sells components and other production systems for the

automotive industry. It is organized in three main units (see Figure 6): Magneti Marelli (74.10%),

Comau (18.10%) and Teksid (8,50%). This kind of sector is, as well as Luxury Brands, worldwide

based.

Despite Fiat’s core business is the automotive sector, it has also invested in news and

communication business (e.g. La Stampa, Rcs MediaGroup, and Publikompass).

1.3 Sources of data

Fiat S.p.A. 2013 annual report provides both qualitative and quantitative information about the Fiat’s

range of product and the countries where it operates. Moreover, the case study written by Michael

Guichon (Columbia Business School) gives more details about Fiat’s business units. However, it is

also important to mention the firm’s website, which provides several information about the company’s

history and its main businesses.

Figure 6: Breakdown by Components

9

Chapter 2: Strategic aspects

2.1 Assets

2.1.1 Organic investment

In 2009, Chrysler acquisition was the main Fiat’s investment. In fact, during the first part of 2009,

Fiat closed the deal with Chrysler and thanks to this agreement Fiat took 35% stake of the US firm

without any cash payment (see paragraph 2.1.3). Moreover, on April 21, 2010 Sergio Marchionne

(Fiat CEO) announced the new Business Plan 2010-2014, establishing a €26bn investment.

Meanwhile, it set up the split of Fiat in two companies (see paragraph 2.1.2): Fiat S.p.A. (automotive,

components, news and advertising) and Fiat Industrial S.p.A. (industrial assets). Consequently,

€19.7bn were for Fiat S.p.A. and €6.5bn for Fiat Industrial S.p.A. Focusing on the investment in Fiat

S.p.A. €13bn are designated to Fiat Group Automobiles (Fga). Particularly, Fiat S.p.A. invested €4bn

in the Brazil market (first Fiat market from 2010), €1bn in Poland (Lancia Ypsilon) and Serbia (lancia

Musa, Fiat Idea and Fiat Multipla). Moreover, approximately €3bn were invested in R&D. Finally, Fiat

designed nearly €5bn in the Italian market in order to reorganize its production in its most important

plants in Italy. Consequently, Fiat achieved several agreements with the union, related to the main

plants: on June 15, 2010 for Pomigliano, on December 23, 2010 for Mirafiori, on May 4, 2011 for

Grugliasco, on Jauary 24, 2013 for Melfi. Moreover, Fiat’s management announced that, before

proceeding with the investments, workers approval in a referendum was fundamental in order to

guarantee high efficiency levels of production (see paragraph 2.2.1). After the positive reaction

showed by Fiat employees, investment started. Particularly, €800m were invested in Pomigliano

(Fiat Panda), €1.3bn in Mirafiori (Jeep and Alfa Romeo), and approximately €1bn in Grugliasco

(Maserati Quattroporte and Maserati Ghibli) and in Melfi (Fiat 500X and Jeep utility vehicles). It is

important to underline that Fiat invested approximately €700m in Sevel plant in Atessa (owned as

50/50 between Fga and PSA-Peugeut Citroen) and nearly the same in Cassino (Fiat Bravo).

10

2.1.2 Spin-off Fiat S.p.A. and Fiat Industrial

In 2010, Fiat’s CEO, Sergio Marchionne, announced the necessity of restructuring the Fiat’s existing

business thanks to the spin-off of industrial assets in order to give a significant improvement in

strategic flexibility to those businesses. Then, on July 21, 2010, Fiat’s board approved the creation

of new independent company (i.e. Fiat Industrial S.p.A.). Therefore, “The spin-off will see Fiat’s Iveco

trucks, Case New Holland farming and construction equipment and its industrial and marine engines

business split off from its Fiat, Ferrari and Maserati car brands, automotive car business”2 and news

industry. On January 1, 2011, the spin-off was completed and on January 3, 2011 Fiat Industrial

S.p.A. was listed in the Milan Stock Exchange for the first time. Moreover, it is important to analyze

the structure of the two firms’ board. On one hand, Fiat’s chairmen and CEO are respectively John

Elkann and Sergio Marchionne, on the other hand, Marchionne is both the chairmen and the CEO

of Fiat Industrial. Fiat’s shareholders received Fiat Industrial’s shares in same type and same number

Fiat’s share, which they held when the spin-off took place. Despite the two firms are separately

traded, Fiat owns 3% Fiat Industrial’s equity. The spin-off of industrial assets has been a milestone

for the company’s strategy. In fact, Fiat S.p.A. and Fiat Industrial S.p.A. have different businesses,

investments in R&D and mostly different targets and markets. Therefore, investors can understand

clearly and easily what goals are followed and what is the main business.

2.1.3 Fiat – Chrysler M&A

Chrysler Group LCC was pushed to the brink by the economy collapse of 2007-2009. On January

2009, Fiat S.p.A. and Chrysler LCC announced a non-binding agreement to form a global

partnership. Under that, Fiat could take a 35% stake in Chrysler, obtaining an access to the US

market and providing the US firm new technologies. However, an agreement on a reduction of cost

of labor with the two biggest unions (i.e. UAW and Canadian Auto Worker’s Union) was fundamental

in order to close the deal. At the end of April 2009 this agreement was reached. After that, Chrysler

filed for Chapter 11 bankruptcy protection at the Federal Bankruptcy Court of the Southern District

2 “Fiat to spin off non-car divisions” Financial Times (21/02/2010)

11

of New York. It was a “surgical” default in order to reduce the company’s liabilities. Therefore, on

June 10, 2009 Fiat S.p.A. took a 20% stake of Chrysler without any cash payment with the option of

taking additional equity up to a 35% stake if three performance events are achieved (i.e. 5% for each

performance event). Firstly, Chrysler was requested to obtain the appropriate government approvals

and to begin commercial production of Fully Integrated Robotized Engine (i.e. FIRE). Secondly, the

US firm was required to achieve cumulative revenue more than $1.5bn outside NAFTA region and

to accomplish commercial agreements for some Chrysler products in South America. Finally the third

performance event is an ecological one, in fact in order to achieve it “Chrysler was required to

receive regulatory approval for an automobile based on a Fiat platform or vehicle technology having

a fuel efficiency rating of at least 40 combined miles per gallon and to irrevocably commit to begin

assembly in commercial quantities in the U.S”3. All these performance events should have been

reached by January 2013. However, if Chrysler had not reached one of these milestones, Fiat could

have bought the 5% stake of Chrysler through an Alternative Call Option.

On January 10, 2011, Fiat’s ownership interest in the company has increased from 20% to

25% when the Chrysler announced the achievement of the first of three performances milestones.

Then, on April 12, 2011, there was another increase of 5% in the Fiat’s ownership interest thanks to

the accomplishment of the second performance event. However, one of the most important date in

the Fiat-Chrysler M&A was May 24, 2011. In fact, in that day “Chrysler paid back $7.6bn in loans

from the American ($5.9bn) and Canadian governments ($1.7bn), paving the way for its Italian

partner, Fiat, to increase its control over the Detroit carmaket”4. Indeed, Fiat could not have taken

additional equity over 49.9% of the US firm up to Chrysler had not payback those loans. Moreover,

Fiat exercised another call option (i.e. Incremental Equity Call Option) in order to raise stake in

Chrysler to 46%. Therefore, Fiat was looking to be the US firm’s majority owner by the end of 2011.

In fact, on July 21, 2011 the Italian company bought both American (6%) and Canadian (1.5%)

stakes respectively at $500 million and $125 million. In this way, Fiat achieved the full control of

Chrysler, increasing its ownership interest up to 53.5%. On January 5, 2012, Chrysler accomplished

3 “Fiat increases its interest in Chrysler Group LCC to 58.5%” Press Release (5/1/2012) 4 “Chrysler pays back rescue loans” by Bill Vlasic, The New York Times (24/5/2011)

12

the third and last performance event, which refers to an environment achievement and Fiat had the

chance to raise its stake of another 5% up to 58.5% according to the Chrysler Group Operating

Agreement. Therefore, at the end of 2013 Chrysler ownership structure was composed as follow:

Fiat S.p.A. (58.5%) and United Auto Workers' health-care trust fund (41.5%). Finally, it is useful to

analyze the reasons behind Chrysler acquisition. In fact, a merger with another partner was a central

and vital deal for Fiat’s future in order to survive in the automotive sector throughout the financial

crisis. First of all, Chrysler is the third largest US auto company and its brand has an international

appeal. Moreover, Fiat and Chrysler have a different range of products and it means a perfect merger

between the two firms. Then, Fiat could take advantage of electric engine technology thanks to the

US A123. In fact, the Italian firm invested less than its competitors did in that technology. In addition,

Fiat could take advantage of producing and selling (thanks to Chrysler point of sales) some its

models destined to the NAFTA region directly in US. Finally, Fiat took a 35% stake of Chrysler

without any capital increase, showing that its assets had a great value. This should bring to an

increase in the share price (see chapter 4).

2.1.4 Fiat and RCS MediaGroup

Despite automotive is Fiat’s main business, it is not possible to forget that the Italian firm plays an

historical role in the newspaper Italian market (i.e. Fiat has started this business in 1926, setting up

“La Stampa”). In 2013, Fiat S.p.A. invested €94m in order to support RCS’ 2013-2015 development

plan. Indeed, the Italian firm not only “subscribed it pro rate share of the RCS’ capital increase but

also purchased additional rights. Following exercise of the rights held Fiat S.p.A.’s interest in RCS

went from 10.09%, as reported at 31 December 2012, to 16.41%”5. Therefore, Fiat S.p.A. begun to

be the majority shareholder of RCS. This is part of a larger business strategy followed by Fiat’s

management, as the reorganization of Publikompass showed. In fact, Fiat’s advertising company

was under pressure due to a 51% revenues reduction in the period between 2010 and 2013,

therefore it was forced to close many divisions and fire more than half of its employees. Many

analysts reckon that it is very likely a merger between Publikompass and RCS Advertising and it

5 “2013 Fiat Annual Report” p. 229

13

could explain the huge Fiat’s investments in RCS MediaGroup S.p.A. Investing a significant amount

of money in RCS could be the first step to become a big player in the Italian newspaper industry and

survive in extremely difficult circumstances.

2.1.5 Other Acquisition and Disposals of subsidiaries

In 2009, Fiat sold minor investments of the Comau and Ferrari Sector and its Component Sector

sold its investment to the subsidiaries, called Ergom France SaS. Moreover, the Italian firm carried

out some investment in a minor company in Brazil; anyway, it was classified like held for sale.

In 2010, Fiat completed the acquisitions of Fiat Powertrain Polska Sp. z.o.o. and it sold Targa

Rent S.r.l., which was already classified as held for sale the past year. Finally, in the other year under

analysis there are not significant acquisitions or disposals of subsidiaries.

2.2 Operations

2.2.1 Efficiency

Fiat carried on its gradual rollout of the Word Class Manufacturing programme (WCM) at all its plants.

The WCM programme was implemented in order to achieve zero defects for products and made the

plants more efficient, improving the customer service and reducing costs. However, these aims

needs to be done without compromising working conditions, safety or the environment. In 2009,

other 23 plants worldwide received the WCM according to the analysis of external audits,

representing the 95% of Group’s total manufacturing costs. In 2010, the number of plants with WCM

increased dramatically. It is possible to observe the same trend in the following year, where the

implementation of WCM reached the 97% of manufacturing costs. At the end of 2013, Fiat

accomplished almost 100% of its plants covered by WCM. This achievement meant the creation of

many projects, including several specially targeted at reducing environment impact.

Moreover, before proceeding the new Business Plan 2010-2014, Fiat CEO announced that:

“Fiat needed certainty, through specific agreements with the unions, as to normal operating

conditions at plants and the ability to respond to the demands of the market with the speed and in

14

the manner needed to be able to compete internationally”6. Consequently, on January 1, 2012, there

was the official Fiat S.p.A.’s withdrawal from Confindustria7 that was announced by the Fiat CEO on

June 30, 2011. This was an important change in the business strategy followed by the management

respect to the past. In fact, this last event opened the way for a direct negotiation between company

and unions. Thus, it was possible to adequate the structure of the contract to the characteristic of a

multinational group. Indeed, Sergio Marchionne (Fiat CEO) underlined that remaining in

Confindustria could be dangerous for the firm efficiency due to the Confindustria’s willingness to

avoid the application of a new legislation about new instruments of flexibility in its contracts. In fact,

he pointed out that Fiat is a firm worldwide based and it needs the flexibility required by the market.

2.2.2 Layoff and plants closure

In 2009, Fiat Group dealt with volatile markets with an erratic and depressed demand respectively

for the automotive sector and construction equipment. Moreover, the automotive sector was

influenced by a dramatic fall in demand and the components one was impacted at different level in

its different business lines. Therefore, the Italian firm was forced to make a plan in order to improve

efficiency and to reduce costs.

Fiat carried out production stoppages in order to respond to these extremely difficult

circumstances. “Almost all Sectors utilised Chômage Partiel in France, Expediente de Regulación

de Empleo in Spain and Kurzarbeit in Germany. In the United States, CNH instituted temporary

layoffs at its plants in Wichita, Burlington and Calhoun, all belonging to the Construction Equipment

business. Suspension of production activities, which took various forms, also involved the plants of

certain Sectors in other countries, such as Poland, Belgium and the UK.”8 Moreover, significant

restructuring and reorganization plans took place in different countries in all Fiat’s strategic

geographical regions. In Italy, the management established redundancy programs for retirements

during the period covered by “mobilità” (i.e. particular Government scheme). Moreover, Fiat’s

6 2010 Fiat Annual Report p.58 7 Confindustria is the Italian employers' federation and national chamber of commerce 8 2013 Fiat Annual Report p.54

15

management used the temporary layoff benefit scheme. Anyway, the scheme limits were reached

(52 weeks in any rolling two-year period) and it was necessary the extraordinary temporary layoff

benefit scheme (further 12 months). It is useful to highlight that Fiat planned to close its plant in Sicily

(i.e. Termini Imerese). Focusing on other countries, many agreements with the trade unions were

established in order to carry out reductions: approximately 350 employees (including early

retirement) in Spain, 46 in France thanks to a voluntary redundancy programs, 200 in UK and

approximately 330 in Germany due to problems that affected Iveco and Magneti Marelli.

In 2010, Fiat was forced to carry on the production stoppages in several countries. In Italy,

there was a huge use of the temporary layoff benefit scheme, and it did an ample use of the

extraordinary layoff benefit scheme as described for the 2009. However, it was also necessary “to

activate the process for application of the exceptional temporary layoff benefit scheme (provided for

under emergency social welfare legislation)”9 and it covered approximately 7,500 worker by the end

of the year. Moreover, thanks to agreements with the trade unions there was a headcount reduction

of 1,500 employees between 2010 and 2011. All of them were eligible for retirement during the period

covered by “mobilità”. In Spain, on December 27th, “a majority of workers voted in favor of the

agreement signed between the company and trade unions relating to closure of the plant and

redundancy packages for approximately 270 staff”10 . Moreover, there were another headcount

reduction of 116 employees (all eligible for early retirement) in the Iveco plants. In USA,

approximately 58 employees adhered to the voluntary redundancy scheme after an agreement with

local unions.

During 2011, conditions were very different in several Fiat’s strategic markets. There were

weak signs of recovery in the North American market, but in the others, the economic remained

depressed. Therefore, Fiat was forced to carry on production stoppages in order to reduce the costs

and being competitive. In Italy, there was a huge use of ordinary and extraordinary temporary layoff

9 2010 Fiat Annual Report p.60 10 2010 Fiat Annual Report p.60

16

benefit scheme. Anyway, there were no other restructuring or reorganization initiatives in other

countries.

In 2012, both North and South America markets showed a significant improvement, while in

Europe the demand remained depressed. On the other hand, in Italy Fiat still carried out an extensive

use of the temporary layoff benefit schemes. It is also important to underline 1,410 redundancies in

Poland.

Finally, there was a huge recovery in the most of the Fiat’s strategic geographical regions in

2013. There were no particular restructuring or reorganization plans. Anyway, in Italy, Fiat was forced

to carry out some production stoppages. However, the Italian firm covered them thanks to the use

of temporary layoff benefit scheme.

2.3 Financing

2.3.1 Rights issue

Fiat S.p.A. issued new share only during 2011 between 2009 and 2013. In fact, in that year, “the

number of shares issued by Fiat S.p.A. increased by 433,125 and share capital increased by €2

million as certain managers exercised the options granted to them under the November 2006 stock

option plan”11.

2.3.2 Conversion of preferences and saving shares

On April, 4, 2012 the extraordinary shareholders’ meeting established the mandatory conversion of

Fiat S.p.A. preference shares (103,292,310 shares) and saving ones (79,912,800 shares) into

157,722,163 Fiat S.p.A. ordinary shares with dividend right starting from January 1, 2012. Indeed,

the conversion ratios are: 0.85 and 0.875 respectively ordinary share per preferences and savings.

11 2011 Fiat Annual Report p.192

17

2.3.3 Share repurchased

At the end of 2009, Fiat S.p.A. treasury shares consist of approximately 38.5m Fiat ordinary shares,

which is equal to €656.6m. The Italian firm purchased them thanks to a buy-back program, called

“The Programme”, approved by shareholders meeting on March 31, 2008. This program established

the possibility to purchased treasury shares in case the following conditions. Firstly, the deadline for

the program was September 30, 2009, or the accomplishment of the maximum purchased value of

€1.8bn, (considering also the share already held by Fiat S.p.A.) or the 10% of share capital was

reached. Secondly, the maximum repurchased price could not exceed the market price of the

previous day by more than 10%. Finally, the maximum number of share repurchased could not go

beyond 20% of total trading day value for every share class.

On March 27, 2010, shareholder General meeting renewed their authorization for the share

repurchase in order to maintain Fiat S.p.A. operating flexibility. In 2010, despite the program was

stopped, “The Programme” was renewed for the second time on March 26, 2010. Moreover, on

February 16, 2010 the extraordinary general meeting approved a reduction in the authorization to

€1,2bn in order to take in consideration in the reduction of par value of Fiat share following the spin-

off. In 2011, the buy-back program carried on to be place on hold as much as in the two following

years. Anyway, the shareholder General Meeting renewed this kind of program twice: on April 4,

2012 and on April 9, 2013.

2.3.4 Debt issues

Before analyzing the principal debt issues, it is important to distinguish the Continuing Operation and

Discontinuing Operation. The first one is related to segments of a company’s business considered

normal and expected to operate in the future. On the other hand, the second one is referred to all

business that has been sold, abandoned or disposed of.

In 2009, the principal bond issuing was related to Continuing Operations, particularly to the

Global Medium Term Notes (GMTN) program promoted by Fiat Finance & Trade Ltd. S.A, maturing

in different years (€1,250m in 2012, €1,250m in 2014 and €1,500m in 2015). Moreover, in 2010, it is

18

important to underline the issue of bonds $1.5bn by Case New Holland Inc., which belongs to

Discontinuing Operation, maturing in 2017. The level of debt of the Continuing Operation was

reduced thanks to a repayment on maturity of bond issues.

During 2011, focusing on Continuing Operation, the Italian firm issued “new bonds for €2,500

million (GMTN) during the year and repaid bonds on maturity for €2,448 million”12. The new issues

were characterized by different maturity: €900m due July 2014, €1,000m due April 2016 and €600m

in 2018. Moreover, the increase in the level of debt was caused mainly by the consolidation of

Chrysler’s debt. Therefore, there was the recognition of the notes issued by the US firm (i.e. Chrysler

Secured Senior Notes). During 2012, in coherence with the GMTN program, Fiat S.p.A. issued new

bonds for €2,535m with different maturity (CHF425m due September 2015, €850m due March 2017,

€600m due October 2015 and CHF400m due November 2016) repaying bonds on maturity for

€1,450m. In addition, in 2013, there was a new bond issues for €2,866m (GMTN) and a repayment

on maturity for €1,000m. The bond issues had different maturity: €1,250m due March 2018, €850m

due October 2019, €400m due October 2019 and CHF450m due November 2017).

Finally, “Most of the bonds issued by the Group impose covenants on the issuer and, in

certain cases, on Fiat S.p.A. as guarantor”13. These covenants included: negative pledge clauses

(i.e. “bonds benefit from any existing or future pledges of assets of the issuer and/or Fiat S.p.A.

granted in connection with other bonds or debt securities having the same ranking”14), pari prassu

clauses (i.e. “no obligations ranking senior to the bonds in question may be assumed”15), periodic

disclosure clauses and cross default (i.e. “immediate repayment of the bonds under certain events

of default on other financial instruments issued by the Group”16).

12 2011 Fiat Annual Report p.210 13 2009 Fiat Annual Report p.213 14 2009 Fiat Annual Report p.213 15 2009 Fiat Annual Report p.213 16 2009 Fiat Annual Report p.213

19

2.3.5 Debt redemption

Between 2009 and 2013, despite repaying the issued bonds on maturity was the strategy followed

by Fiat S.p.A. management, the company specified that time to time it could be possible to buy back

them on the market. However, it depends on the market conditions, the company’s specific situation

and other relevant factors. Moreover, it is important to analyze what was Chrysler behavior about

the debt redemption due to its consolidation in 2011. Indeed, the US firm had the possibility to pay

back, at any time, its Secured Senior Notes between 30 and 60 days prior communicating it to the

holders of the Notes expected to be redeemed.

2.3.6 Dividend policy

In coherence with the dividend policy approved by Fiat S.p.A. in 2006, the Italian firm had the

willingness to distribute a total dividend to its shareholders of 25% of consolidate profits. Focusing

on the dividend payments for 2009, the Annual General Meeting approved a payment of total

dividend of €244m, particularly, the dividend plan established: €0.17 per ordinary share; €0.31 per

preference share; €0.325 per saving shares. This was possible thanks to “the normalization of the

capital markets as a source of funding for the Group and the belief that the Group will be able to

continue to generate earnings even in a significantly different market” 17 . In fact, the dividend

payments for 2008 were limited to saving shares only in order to improve its capital structure and to

maintain its liquidity. During 2010, dividends to shareholders carried on as established in the dividend

policy approved by the Annual General Meeting in 2006. Indeed, the Board of Director proposed to

shareholders a total dividend of €155.1m: €0.09 per ordinary share and €0.31 per preference and

saving shares. Moreover, in 2010, Fiat S.p.A. showed its intention to maintain unchanged its dividend

policy for 2011 despite its spinoff. However, the following year the Board of Director proposed to pay

a dividend of €39.7m only for preference and saving shares (€0.217 per these two special classes

of share). In fact, Fiat S.p.A. intended to have high level of liquidity and there were restriction on

Chrysler dividend payments. For the same reasons, in 2012, Fiat management proposed to

17 2009 Fiat Annual Report p.191

20

shareholders meeting to avoid dividend distribution. In addition, there was the same advice the

following year in order to balance Fiat S.p.A. liquidity position following the acquisition of a stake in

Chrysler.

2.4 Management

Sergio Marchionne was Fiat CEO before the spin-off and he carried on to be in charge also after the

creation of new and independent company for industrial assets (i.e. Fiat Industrial S.p.A.). It is

important to underline that he is not only the Fiat Industrial S.p.A. CEO but also its chairman (see

paragraph 2.1.2). Anyway, it is possible to see a chairman turnovers between 2009 and 2013. In

fact, in 2009, Luca Cordero di Montezemolo was Fiat chairman and John Elkann, member of Agnelli

family, was the vice-chairman. However, on April 21, 2010, there was a turnover chairman and John

Elkann was nominated as the new Fiat chairman. It was possible because Luca Cordero di

Montezemolo temporary job was over, and it was time for a member of Agnelli family to come back

in charge. In fact, Montezemolo became Fiat chairman in 2004, when Fiat was in a huge crisis and

in the middle of transaction due to the death of both Giovanni and Umberto Agnelli. To put all in a

nutshell, in 2010, John Elkann became officially the new Fiat chairman and he carries on to be in

charge.

2.5 Summary

After a deep analysis of all strategic aspects (i.e. Assets, Operations, Financing and Management)

it is possible to describe the scheme followed by the company in its business plan between 2009

and 2013. Fiat CEO, Sergio Marchionne, led the firm out of the financial crisis with an insightful and

powerful strategy. The Chrysler acquisition was fundamental in order to survive in the deep economic

depression. In fact, thanks to that merger Fiat S.p.A. became one of the most important player in the

automotive sector, conquering an important market such as the American one. Moreover, Fiat S.p.A.

management combined a prudent dividend policy with that acquisition in order to maintain its liquidity

balance and Fiat S.p.A. debt structure was modified due to the consolidation of the US firm in 2011.

The spin-off of industrial sector was another crucial point in the business strategy followed by S.

21

Marchionne. I reckon that it has been a remarkable milestone in Fiat strategy. First of all, it

guaranteed a more understandable picture of the company: in fact Fiat S.p.A. (automotive sector)

and Fiat Industrial S.p.A. (industrial assets) have different target markets and goals. Then, it

represented an important step to a possible future reorganization of Fiat S.p.A. and Chrysler Group

LCC under the same brand.

In addition, it is useful to underline how Fiat S.p.A.’s withdrawal from Confindustria was a

natural effect of the new strategy followed by the management, completely different from the past.

In fact, S. Marchionne required agreement with the trade unions on some essential key points in

order to invest. Indeed, he highlighted how it is important to maintain the flexibility required by the

market and this was clear in the strategy of reorganization of Fiat S.p.A. plants.

Finally, the chairman turnover was an important event for the company looking back at the

history of the firm. In fact, in 2009 a member of Agnelli family (i.e. John Elkann) came back in charge

after the death of Giovanni and Umberto Agnelli and a transition period led by Luca Cordero di

Montezemolo.

22

3: Performance and accounting ratios

3.1 Methodology

Focusing on Fiat performances, I carried out an analysis of the main accounting ratios: liquidity,

profitability, efficiency, solvency and leverage. Moreover, in order to strengthen my study I did the

same for three its competitors: Renault, Toyota Motor Corporation and Volkswagen Group. I evaluate

two ratios for each one of the aforementioned performance aspects. Finally, the main sources are

the annual reports of the companies analyzed. Particularly, I always considered the restated values

in order to take in account the most updated values and in order to consider the changes in the

IAS/IFRS18.

3.2 Accounting ratios: analysis19

3.2.1 Liquidity

In order to analyze Fiat S.p.A. and its competitors short-term solvency, I took in exam two of the

most widely used ratios: Current ratio (i.e. Total Current Assets / Total Current Liabilities) and Quick

ratio (i.e. [Total Current Asset – Inventories] / Total Current Liabilities) (Figure 7). Focusing on the

results of the first one, in 2009 Fiat S.p.A. had €2.23 in current assets for every €1 in current liabilities.

According to the academic literature, Fiat S.p.A was in a very good situation for the creditors’ point

of view because it was expected to be solvent in the short-term. Moreover, in 2011, Fiat’s current

ratio significantly decreased due to a remarkable growth of the current liabilities. However, between

2011 and 2013 the Italian firm maintained a satisfactory financial situation for its creditors, in fact its

current ratio was stable nearly 1.45. Focusing the analysis on Fiat S.p.A. competitors, they had a

current ratio constantly slightly above 1.00 between 2009 and 2013, apart from for Renault in 2009

(i.e. its current ratio was 0.95). This level is optimal for the creditors (it means that the company is

18 International Accounting Standards/International Financial Reporting Standards 19 In order to better analyze the table of the accounting ratios it is possible see the attachment, called “Fiat S.p.A. case study. Accounting ratios and stock price analysis”, at my profile on academia.edu by means of the following link: https://unibocconi.academia.edu/LucaBorboni; in order to download the file it is possible login with a remote access by the following data. Email: antonio.borboni@gmail.com; password: 12cicerone

23

solvent in the short term) as well as for the firm that is carrying on an efficient use of its liquidity (i.e.

cash and other assets).

However, calculating a second ratio (e.g. Quick ratio) is fundamental to broaden, develop

and strengthen the analysis of short-term solvency. In fact, the quick ratio does not consider the

inventory, which is the least liquid current assets. Indeed, “relatively large inventories are often a

sign of short-term trouble. The firm may have overestimated sales and overbought or overproduced

as a result.”20 According to many researches, it is possible to say that a quick ratio between 1.00

and 0.8 represent a normal situation for creditors, while it is alarming for them from 0.8 to 0.5.

Moreover, the situation is very serious below that level. Therefore, it is possible to state that the quick

ratio follows the same trend showed by the current ratio. In fact, Fiat’s quick ratio significant

decreases from 2010 to 2011 and it was stable between 2011 and 2013. Moreover, the figure 7

shows how the quick ratio of Fiat’s competitors was constantly above the 0.80 and, consequently, it

confirms their good liquidity management.

20 David Hiller, Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan “Corporate Finance” p.72

TCA = Total Current Assets

TCL = Total Current Liabilities

Current ratio Quick ratio

TCA/TCL (TCA-Inventories)/TCL

2009 2.23 1.76

2010 2.19 1.87

2011 1.46 1.10

2012 1.44 1.08

2013 1.46 1.08

2009 0.95 0.84

2010 1.02 0.90

2011 1.02 0.90

2012 1.04 0.95

2013 1.05 0.97

2009 1.07 0.93

2010 1.22 1.09

2011 1.10 0.98

2012 1.05 0.91

2013 1.07 0.93

2009 1.12 0.92

2010 1.12 0.89

2011 1.05 0.77

2012 1.07 0.80

2013 1.03 0.79

Fiat S.p.A.

Renault

Toyota Motor

Corporation

Volkswagen Group

liquidity

Company Years

Figure 7: Liquidity ratios

24

3.2.2 Profitability

In order to evaluate Fiat and its competitor’s profitability I considered two ratios: Profit Margin (i.e.

net income / sales) and ROE (i.e. net income / total equity). The first one analyzes the ability of the

company to convert revenue in actual profit. Obviously, a low profit margin is often an indicator of a

low margin of safety because there is a higher risk that a small decrease in sales lead to an erase

in profits, and a consequently net loss (Figure 8)

.Figure 8: Profitability ratios

In 2009, Fiat S.p.A., Renault and Toyota were characterized by a negative profit margin

(respectively -2.59%, -9.46% and -2.41%) due to a negative net income. In fact, that year was very

difficult for all the players in the automotive sector. Anyway, Volkswagen was the only one that

managed to have a positive net income and, consequently, a positive profit margin (i.e. 0.87%).

However, the following year, all the firms analyzed showed their ability of convert their revenues in

profits (i.e. a positive profit margin). Particularly, it is important to underline how Renault and

Volkswagen completely succeeded in inverting the negative value of the previous year: in fact, their

profit margin was respectively 9.27% and 5.70% rather than Fiat S.p.A. and Toyota, which were

TE = Total Equity

Profit margin ROE

Net Income/Sales Net Income/TE

2009 -2.59% -7.63%

2010 1.67% 4.82%

2011 2.77% 13.47%

2012 1.07% 10.71%

2013 2.25% 15.50%

2009 -9.46% -18.63%

2010 9.27% 15.34%

2011 5.19% 8.71%

2012 4.20% 7.07%

2013 1.70% 2.99%

2009 -2.41% -4.35%

2010 1.38% 2.23%

2011 2.61% 4.26%

2012 2.10% 3.33%

2013 5.18% 8.48%

2009 0.87% 2.43%

2010 5.70% 14.83%

2011 9.92% 24.94%

2012 11.36% 26.69%

2013 4.64% 10.16%

profitability

Company Years

Fiat S.p.A.

Renault

Toyota Motor

Corporation

Volkswagen Group

25

characterized by a profit margin slightly above zero. Moreover, between 2010 and 2012, the profit

margin of the French and German company followed an inverse trend: Volkswagen significantly

increased its ability to convert its revenues in actual profit, while Renault was characterized by a

remarkable reduction of its profit margin. The different trend of their net income was the main reason

of the aforementioned inverse trend of their profit margin. In fact, the net income of the German

company significantly rose, while that one of Renault remarkably decrease. Anyway, in 2013,

Volkswagen, as well as the French company, had a significant fall in their profit margin, particularly

because of a remarkable drop in their net income. On the other hand, Fiat S.p.A. and Toyota Motor

Corporation showed a very low profit margin (i.e. nearly 1.5%). Particularly, a stable and low profit

margin characterized both the Italian firm and the Japanese one in 2011 and 2012. In 2013, Fiat

S.p.A. maintained its stable trend, instead of Toyota, which showed a significant increase in its profit

margin (i.e. 5.18%).

Focusing on the second index, “Return on equity (ROE) is a measure of how the shareholders

fared during the year”21. Thanks to this measure, it is possible to highlight how the automotive sector

was depressed in 2009. In fact, Fiat S.p.A. (-7.63%), Renault (-18.63) and Toyota (-4.35%) showed

a negative ROE. In addition, a low ROE characterized Volkswagen, which was the only one that

maintained a positive level of profitability for the shareholder in a serious negative market.

Focusing on the Italian firm, in 2010, 2011 and 2013, its ROE raised mainly due to an increase

in its net income (respectively it reached 4.82%, 13.47% and 15.50%), while it plummeted at 10.71%

in 2012 due to a reduction in its operating results. Anyway, between 2009 and 2013 Fiat S.p.A. had

a great performance referring to its competitors. In fact, in my sample, Volkswagen was the only

company that showed a higher ROE than Fiat, particularly between 2009 and 2012. Furthermore,

from 2010 to 2012, Toyota performed a low return on equity due to its insufficient net income.

Anyway, in 2013, it showed a significant increase in its ROE thanks to a growth in its operating

income. Finally, in 2010, Renault was characterized by a significant increase in the return on equity

21 David Hiller, Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan “Corporate Finance” p.76

26

mainly thanks to a growth of its net income. While, between 2011 and 2013 it is possible to see a

dramatically and persistent fall in the ROE as well as in its operative results.

3.2.3 Efficiency

In order to examine the efficiency I took in consideration two ratios: Total Asset Turnover (i.e. sales

/ total assets) and Inventory turnover (i.e. cost of goods sold / inventories) (Figure 9).

Figure 9: Efficiency ratios

Between 2009 and 2013, Fiat S.p.A. showed a significant and constant increase in the assets

turnover. In fact, in 2009, the Italian firm generated 0.49 Euro for every Euro in assets and it reached

the value of 1.00 in 2013. This meant that the net sales of a company equals the average total assets

for that year. In other words, the company is generating 1 dollar of sales for every dollar invested in

assets. All the aforementioned results are based in the significant increase of Fiat’s sales. On the

other hand, Volkswagen was characterized by a more stable and lower total asset turnover than that

one of Fiat S.p.A. Anyway, it is not possible to conclude that Volkswagen is less efficient than Fiat

S.p.A. since the sales of the German carmaker are characterized by a positive trend (i.e. a growth

TA = Total Assets

Total asset turnover Inventory turnover

Sales/TA Cost of goods sold/Inventories

2009 0.49 3.23

2010 0.49 6.91

2011 0.74 5.56

2012 1.02 7.71

2013 1.00 7.29

2009 0.51 6.86

2010 0.54 6.70

2011 0.56 7.64

2012 0.55 8.82

2013 0.55 10.63

2009 0.66 11.97

2010 0.58 11.23

2011 0.60 12.26

2012 0.57 9.74

2013 0.59 10.50

2009 0.59 6.49

2010 0.64 5.98

2011 0.63 4.77

2012 0.62 5.49

2013 0.61 5.63

Toyota Motor

Corporation

Volkswagen Group

efficiency

Company Years

Fiat S.p.A.

Renault

27

of approximately 87.30% in 5 years). Therefore the low total asset turnover is mainly determined by

a remarkable expansion of the total asset because of the several acquisition accomplished by

Volkswagen in the period under analysis. Contrary, the stable at a low level of the total asset turnover

of both Renault and Toyota (i.e. nearly an average of 0.54 and 0.60 respectively Renault and Toyota)

was caused mainly by a sluggish level of sales between 2009 and 2013.

However, in order to broaden and develop the analysis of Fiat and its competitor’s efficiency

it is important to examine the results of a second ratio, that is inventory turnover (i.e. Cost of goods

sold/inventories). I did not apply the inventory turnover defined as Sales/inventories since sales are

recorded at market value instead of inventories at cost. This ratio measures company's efficiency in

turning its inventory into sales. On other worlds, the purpose is to measure the liquidity of the

inventory. Therefore, low inventory turnover ratios means a situation of inefficiency, since inventory

usually has a rate of return of zero.

Focusing on Fiat S.p.A, a positive trend of inventory turnover strengthen the aforementioned

results stated by the total asset turnover. In fact, it is possible to see how the inventory turnover

constantly rose between 2009 and 2012 (i.e. from 3.23 in 2010 to 7.71 in 2013). In 2013, there was

a slightly decrease mainly due to an increase in the level of inventories. The same positive trend

characterized Renault, despite its low asset turnover (i.e. between 2009 and 2013 the inventory

turnover rose from 6.86 to 10.63). In addition, despite the cost of goods sold of Volkswagen

increased year by year its inventory turnover was characterized by a stable trend. This situation was

determined by a remarkable growth of the inventories (in particular, finished goods registered a

significant increase). Finally, it is possible to state that the Japanese carmaker had a high inventory

turnover between 2009 and 2013 mainly thanks to low level of inventories. Anyway, in 2012, there

was a significant fall of the inventory turnover due to an increase in the level of inventories and a

decrease in the level of sales showed by a reduction of the cost of goods sold.

28

3.2.4 Solvency

Analyzing Fiat S.p.A. and its competitors’ solvency, I considered two ratios: Total Debt Ratio (i.e.

[total assets – total equity] / total assets) and Time Interest Earned (i.e. EBIT / interest expenses).

The first one shows a company’s ability to pay off its liabilities with its assets. On other worlds, it

presents the requested amount of assets to be sold in order to pay off all its liabilities (Figure 10).

Figure 10: Solvency ratios

All the companies analyzed presented a high level of debt between 2009 and 2013. In fact,

all of them showed a total debt ratio above the normal level, which is considered 0.50. Particularly,

Fiat S.p.A. was the firm with the highest total debt ratio, which fluctuated from a minimum of 0.68 in

2013 to a maximum of 0.90 in 2012. This means that Fiat S.p.A. had up to €0.90 in debt for each

€1 in assets. Focusing on its competitors, despite Volkswagen and Renault presented a lower total

debt ratio than Fiat S.p.A. (i.e. respectively an average of 0.75 and 0.69), it was remarkable above

the aforementioned normal value. On the other hand, between 2009 and 2013, Toyota was

characterized by the lowest total debt ratio. In fact, it was stable nearly 0.64. It means that its liabilities

TA = Total Assets TE = Total Equity

Total debt ratio Time interest earned

(TA-TE)/TA Ebit/Interest expenses

2009 0.83 1.29

2010 0.83 2.77

2011 0.85 2.70

2012 0.90 1.81

2013 0.68 1.51

2009 0.74 -5.20

2010 0.68 8.10

2011 0.66 7.42

2012 0.67 6.06

2013 0.69 3.51

2009 0.64 -10.95

2010 0.64 9.72

2011 0.63 20.21

2012 0.64 19.88

2013 0.64 62.12

2009 0.79 1.56

2010 0.76 5.19

2011 0.75 10.25

2012 0.74 11.01

2013 0.72 6.25

Company Years

Fiat S.p.A.

Renault

Toyota Motor

Corporation

Volkswagen Group

solvency

29

were only the 64% of its total assets. This level could be enough to ensure creditors about being

repaid.

In order to broaden my analysis, I considered the time interest earned (TIE) ratio. This value

is proportional to the amount of income that, in the next future, could be used to cover interest

expenses. Therefore, higher it is, less is the credit risk. In fact, it shows the ability of the firm to

achieve debt service payments and to make interest.

Renault and Toyota showed a negative TIE ratio during 2009 due to a negative EBIT

(earnings before interest and taxes). The main reasons for that awful result were the effects of the

financial crisis on the automotive sector. In fact, in 2009 all the players in that sector presented a

severe reduction in their EBIT. Indeed, in 2009, Volkswagen’s TIE ratio was very low (i.e. 1.56) as

well as Fiat S.p.A. (i.e. 1.29). Moreover, it is important to underline that the high interest expenses

due to the high level of debt caused the persistent low Fiat S.p.A. TIE ratio between 2009 and 2013.

On the contrary, Toyota performed a high TIE ratio from 2010 and 2013 mainly thanks to the low

interest expenses. Particularly, in 2013, its TIE ratio increased dramatically thanks to a significant

increase in its EBIT. On the other hand, Renault and Volkswagen showed the same TIE ratio trend.

In fact, their EBIT covered several times their interest expenses from 2010 to 2012. Moreover, both

Renault and Volkswagen Group’s TIE ratio decreased due to a dramatic fall on the EBIT in 2013.

3.2.5 Leverage

In this report, the last performance aspect considered is the leverage (Figure 11) thanks to the

analysis of two ratios: “Debt / Equity” (D/E) ratio and “equity / fixed assets” (E/FA). The first one

shows, as percentage, how much of the company’s financing comes from creditors and investors.

Consequently, a higher D/E illustrates that more creditor financing is used than investor one, that is,

more bank loans are used than shareholders, and the firm is considered to be riskier. Moreover, it is

clear that its trend is directly influenced by the value of the total debt ratio.

30

Therefore, Fiat S.p.A. showed the highest D/E ratio (i.e. an average of 5.42) due to the high

level of debt (see paragraph 3.2.4) between 2009 and 2013. This means that the Italian firm had a

very high level of leverage. Particularly, in 2012, its D/E ratio reached its peak at 8.81 mainly due to

a significant reduction of its equity, which is determined by the retrospective application of the

amendment to IAS 19 from January 1, 2013. Moreover, Volkswagen had a lower D/E ratio than Fiat

S.p.A. in coherence with the total debt ratio trend (see paragraph 3.2.4). Furthermore, between 2009

and 2013 Renault was characterized by a low D/E ratio mainly thanks to a low and constant level of

debt. Finally, it is important to highlight how Toyota was the less leveraged firm from 2009 to 2013

thanks to its low level of debt (see paragraph 3.2.4). On the other hand, the second ratio (i.e. equity

/ fixed assets) analyzes the relative exposure of debt holders and shareholders to the fixed assets

of the firm. It is widely used by lenders in order to evaluate the creditworthiness of the firm. In fact, a

high “equity to fixed assets” ratio means that the shareholders have financed the majority of the fixed

assets and, consequently, an extension of credit is quite secure. However, high ratio could be not

D = Debt E = Equity

TE = Total Equity

Figure 11: Leverage ratios

2009 5.05 0.86

2010 4.89 1.30

2011 5.85 0.59

2012 8.81 0.38

2013 5.90 0.55

2009 2.88 1.34

2010 2.08 1.98

2011 1.97 2.16

2012 2.07 2.13

2013 2.23 2.12

2009 1.74 1.43

2010 1.78 1.63

2011 1.73 1.73

2012 1.77 1.77

2013 1.78 1.86

2009 3.73 1.53

2010 3.09 1.88

2011 3.00 1.99

2012 2.77 2.08

2013 2.60 2.12

leverage

D/E TE/Fixed AssetsCompany Years

Fiat S.p.A.

Renault

Toyota Motor

Corporation

Volkswagen Group

31

so positive for shareholders, because they could have obtained a higher return rate if the credit was

used by the firm for its advantage.

Renault, Toyota and Volkswagen showed an “equity to fixed assets” ratio remarkable above

1.00 between 2009 and 2013. This means that their shareholders have financed the totally amount

of the fixed assets, consequently their creditworthiness was very high. In 2009 and 2010, Fiat S.p.A.

maintained a satisfactory “equity to fixed assets” ratio respectively 0.83 and 1.30. Anyway, between

2011 and 2013, that ratio plummeted at 0.55, reaching the bottom at 0.38 in 2012, which is influenced

by the aforementioned new amendment of IAS 19. This means that Fiat S.p.A. financed the majority

of its fixed assets with debt, worsening its creditworthiness. Finally, it is possible to state how Fiat

S.p.A. was remarkable more leveraged than all its competitors were.

3.3 Limitation

Despite the “time interest earned” is a common measure in order to analyze long-term solvency, it

presents a significant limitation. In fact, “it is based on EBIT, which is not really a measure of cash

available to pay interest. The reasons is that depreciation, a non-cash expense, has been deducted

out”22. However, in this report I considered the TIE ratio instead of the coverage ratio (i.e. [ebit –

depreciation] / interest) in order to guarantee a uniform measure between Fiat S.p.A. and its

competitors.

22 David Hiller, Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan “Corporate Finance” p.74

32

Chapter 4: Performance and Stock Price

4.1 Methodology

In order to analyze Fiat S.p.A. and its competitors’ stock price trend between 2009 and 2013, I

considered the daily last price for each company. Particularly, I considered both trading and no

trading days in order to guarantee a uniform analysis throughout the companies examined in this

report. In fact, they are listed in different stock exchange and in different countries (i.e. Fiat S.p.A. in

Italy, Renault in France, Toyota in Japan and Volkswagen in Germany); consequently trading days

are not perfectly the same. Therefore, when the stock was traded I rebased its price so that all stock

prices started at 100. In fact, I divided each daily last price by the first one and I multiplied for 100.

On the other hand, the graph showed a blank space in no trading days.

Finally, the main sources has been Bloomberg and I considered the historical pricing

adjusted in order to reflect Spin-Offs, Stock Splits/Consolidations, Stock Dividend/Bonus and Right

Offerings/Entitlement.

4.2 Performances analysis (figure 12)23

In the first three months of 2009, Fiat S.p.A. and its competitors, apart from Toyota, showed a

remarkable decrease of their stock prices, which plummeted in March 2009. This negative trend was

caused by a persistent and drastic reduction of car sales. In fact, demand for vehicles has fallen

particularly in the US and European markets due to the financial crisis of 2008. Consequently,

governments introduced the eco-car subsidies in order to support the sales of new cars. Moreover,

many governments granted automotive companies guaranteed loans in order to prevent the entire

collapse of the industry. Therefore, in April 2009, Fiat S.p.A. and its competitors’ stock prices showed

a significant increase thanks to all the extraordinary measures implemented by governments.

23 In order to fully appreciate the analysis of the stock price trend it is possible see the attachment, called “Fiat S.p.A. case study. Accounting ratios and stock price analysis”, at my profile on academia.edu by means of the following link: http://unibocconi.academia.edu/LucaBorboni; in order to download the file it is possible login with a remote access by the following data. Email: antonio.borboni@gmail.com; password: 12cicerone

33

Moreover, it is important to highlight how Fiat S.p.A. stock price rocketed thanks to the agreement

about the merger with Chrysler.

In August 2009, Fiat S.p.A., Renault and Toyota showed a positive trend thanks to an

increase of car sales. On the other hand, Volkswagen’s stock price plummeted due to the merger

with Porsche. In fact, Volkswagen was negative influenced by the speculation around that strategic

operation. Moreover, during October 2009, there was a remarkable growth in the Fiat S.p.A. stock

price thanks to the aforementioned agreement with Chrysler Group LCC. In fact, a report published

by Morgan Stanley underlined that there was an unexpressed value beyond the merger with one of

the most important American carmaker.

In addition, it useful to analyze the dramatic fall in Fiat S.p.A. and both Toyota and Renault’s

stock price on February 2010 due to a reduction in the car sales. In the same month, Volkswagen

was characterized by a stable trend. Furthermore, Toyota showed a dramatically fall in the its stock

price mainly due to a significant recall of its car sold, which experienced a wide range of problem

such as steering controls and fuel leakage. Moreover, between February and August 2010, there

were 13 Toyota recalls. This significantly affected investors and reduced the brand power of the

Japanese company. As a result, its stock price showed a negative trend in all the 2010.

Focusing on the last months of 2010, both Fiat S.p.A. and Renault showed a remarkable

increase in their stock prices. On the one hand, investors reacted positively to Fiat spin-off and to

the announcement of unexpected positive results of its operations. Therefore, the Italian firm reached

its peak on January 2011. On the other hand, Renault was positive influenced by a partial sale of its

stake in Volvo. In fact, the French firm succeeded in reducing its debt. Moreover, Volkswagen’s stock

price showed a slightly increased.

Despite Fiat S.p.A. and Renault showed the same trend from 2009 to 2013, there was an

interesting and huge gap between January and August 2011. This could be explained analyzing both

the aforementioned spin-off of the industrial assets (see paragraph 2.1.2) and the merger between

Fiat S.p.A and Chrysler date by date (see paragraph 2.1.3). In fact, that period was crucial for the

34

Chrysler takeover. Moreover, in the same period, Volkswagen’s stock price carried on in its growth

mainly thanks to the accomplishment of excellent results in all its business units. Particularly, on

September 2011, all the carmaker analyzed present an increase of their stock price thanks to the

positive features of the car market, particularly in the Europe. Anyway, in the first semester of 2011,

the passenger car market registered poor results, negative affecting the stock price of particularly

Renault and Fiat S.p.A.

On August 2011, all firms considered showed a remarkable fall in their stock price. Obviously,

the principal reasons was a significant decreased in the US and European car sales. However, the

awful Fiat S.p.A. stock price fall was worsened by the negative results of the joint venture with Tata

and a huge decrease in the demand for new car in Brazil, one of the most important market for the

Italian firm.

In addition, the graph (i.e. figure 12) shows a significant increase in the stock price of the

Italian firm on October 2011. In fact, in that month, the UAW (United Auto Workers) members

approved the “Four-year labor contract” negotiated by Fiat CEO, Sergio Marchionne.

Moreover, all the firms examined showed a positive performance in the first months of 2012

thanks to the satisfactory results of the previous year. Fiat S.p.A. was positive influenced by the

acquisition of another stake of Chrysler. Anyway, their growth was stopped due to a significant

contraction in car sales in Europe between March and May of the same year. Furthermore, in the

second semester of 2012, the stock price trend of all the companies analyzed remained stable.

Finally, in 2013, Fiat and its competitors showed a constant and positive trend. Moreover, it

is interesting to underline how Renault overtaken Fiat S.p.A. thanks to a remarkable increase in its

operating income. Moreover, Toyota’s stock price reduced the gap with the French firm and Fiat

S.p.A. thanks to its high operating income and the yen depreciation, which helped its exports. In

addition, Fiat S.p.A. stock price was positive influenced by rumors about a possible future IPO (i.e.

Initial Public Offering) Fiat-Chrysler at NYSE (i.e. New York Stock Exchange)

35

4.3 Limitations

As abovementioned in the paragraph 4.1, I considered the daily historical prices between 2009 and

2013. Moreover, the aim of the methodology used was to show a blank space in the graph when the

stock was not traded. Anyway, it is not possible to see the interruption of the graph due to the size

of the series. For the same reason, it is not possible to appreciate that all European carmakers

started to be traded on January 2, while Toyota on January 8.

36

Fig

ura

12: S

tock p

rice

s T

rend

37

Chapter 5: Consolidation of analysis: Strategy and Performance

5.1 Strategy and performance

In the last part of this report, I analyze the link between the strategies followed by Fiat S.p.A.

management and the company’s performances from 2009 and 2013. Therefore, it is interesting to

highlight how Sergio Marchionne (i.e. Fiat S.p.A. CEO) had a high liquidity level as a target, as it is

possible to appreciate by the high level of both current ratio and quick ratio (see paragraph 3.2.1).

In fact, in several interviews he underlined that a satisfactory liquidity level was crucial to avoid a

possible credit crunch in a volatile market. Furthermore, maintaining a good liquidity level was

fundamental to carry on the merger with Chrysler. In fact, at the end of 2013, Fiat S.p.A. owned the

58.5% of the American company and the Italian firm should buy out the shares held by a United Auto

Workers Medical Benefits Trust in order to take full control of Chrysler Group. Indeed, it should be a

predictable target due to Fiat S.p.A.’s CEO purpose to make the Italian automaker one of the most

important player over the world. Hence, Fiat S.p.A followed a prudent dividend policy, particularly in

2012 and 2013. It did not reduce its debt position in order to avoid burning off its liquidity.

Consequently, all solvency (i.e. total debt ratio and time interest earned ratio) and leverage (i.e. “debt

to equity” ratio and “total equity to fixed asset” ratio) accounting ratios were significantly high during

the period taken in account in this report (see both paragraph 3.2.4 and paragraph 3.2.5).

In addition, between 2010 and 2013 there was a remarkable growth of Fiat S.p.A. profitability

ratios (i.e. ROE and profit margin ratio; see paragraph 3.2.2) not only thanks to an improvement in

the market conditions but also thanks to Fiat-Chrysler M&A (see paragraph 2.1.3), industrial sector

spin-off (see paragraph 2.1.2) and a reorganizations of its plants (see paragraph 2.2.2). In fact,

according to several analysts the Chrysler acquisition increased the value of the Italian carmaker for

different reasons. First of all, Fiat S.p.A. conquered the US market for the first time in its history; then

it had the possibility to join Chrysler electrical engine researches; finally Fiat S.p.A. increased its

worldwide vocation, which was crucial to survive in the financial crisis of 2008. Moreover, the spin-

off of industrial assets made Fiat business clearer and more understandable by investors (see

paragraph 2.1.2). Finally, doing new investments after an agreement with trade union on some basis

38

points increased firm efficiency as depicted by a growth of efficiency ratios (i.e. total asset turnover

ratio and inventory turnover ratio as it possible to appreciate in paragraph 3.2.3).

Moreover, Fiat S.p.A. stock price trend also stated the aforementioned link between

strategies and performances. Particularly, the graph (figure 12) illustrates a positive market reaction

to the spin-off of industrial assets and Chrysler acquisition, which covered the entire period analyzed

(see paragraph 4.2).

5.2 Future strategies

In the next future, it is reasonable that Fiat S.p.A. will take the full control of Chrysler Group in order

to become one of the ten most important players over the world. Consequently, Fiat-Chrysler will be

listed in the US stock exchange under the same brand in order to obtain cash to support the required

investments. In fact, the US stock market is significant more liquid than the Italian one. The spin-off

of the luxury business unit could be another way in order to have enough financial resources for the

future projects and expansion.

Moreover, I reckon that the new brand Fiat-Chrysler will be a Dutch-based company with UK

tax domicile as Fiat Industrial has been since 2012 after the merger with Cnh. Anyway, being Dutch-

based is fundamental for the future Fiat-Chrysler strategy. Indeed, in Netherlands, historical

shareholders who take part at the merger can exercise a double vote for each share owned. In this

case, the Agnelli’s holding (i.e. Exor) will have an absolute majority with approximately 30% stake of

Fiat S.p.A. This means that part of Exor stake could be used for possible strategic alliances with

other players. In fact, the weak point of the new carmaker Fiat-Chrysler will be the small presence

in the Asia market and this will be very relevant for its future and stable growth and for becoming

one of the first three carmaker over the world. In fact, as it is possible appreciate from the graph

below (Figure 13), the Asia market and, particularly, the Chinese one, will significantly increase in

the next seven years compared with the other markets. Therefore, a partnership with one of the other

biggest players is very important for the future of Fiat-Chrysler. Anyway, I reckon unlikely an alliance

with Toyota, which has never had partnerships as a main strategy in its history. However, both

39

General Motors and Volkswagen are also unlikely due to their strong presence in the Brazil market

as well as Fiat-Chrysler (Figure 14). In fact, at the end of 2013, the carmaker with the highest

presence in Brazil were Fiat S.p.A. (22%), Volkswagen (19%) and General Motors (18%). Moreover,

other important players are Ford (9%) and Renault-Nissan (9%). Therefore, they could be accused

to build a monopoly in that specific market. Furthermore, from my point of view, a merger between

Fiat-Chrysler and PSA Peugeot Citroen is also unlikely. Indeed, on the one hand, by means of that

merger Fiat-Chrysler could gain an access to the Chinese car market thank to the significant stake

of the French group owned by Dongfeng Motor (i.e. Chinese carmaker). On the other hand, the

French government, which own a stake of PSA Peugeot Citroen, announced many times that that

firm must remain French, making very difficult and expensive any possible merger. Renault-Nissan

could be the perfect partner for Fiat-Chrysler. Thanks to this merger, Fiat would gain an access to

the Asia market throughout the Japanese Nissan. Moreover, Renault is investing a lot in the electrical

engine technology, one of the biggest weak point of Fiat-Chrysler.

Figure 13: Automotive Sector - trend 2013-2020

Source: Glogal Ihs automotive

40

0%

5%

10%

15%

20%

25%

Fiat Volkswagen GeneralMotors

Fords Renault-Nissan

Automakers' market share in Brazil in 2013 by manufacturer

Figure 14: Brazil car market

Source: Statistica 2014

41

References

1) Fiat Annual Report 2009, 2010, 2011, 2012, 2013

2) Renault Annual Report 2009, 2010, 2011, 2012, 2013

3) Toyota Annual Report 2009, 2010, 2011, 2012, 2013

4) Volkswagen Annual Report 2009, 2010, 2011, 2012, 2013

5) David Hiller, Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan “Corporate

Finance”

6) Michael Guichon, Columbia Business School “FCA Presentation”

7) “The Brand Finance Global 500”

8) Sanderson, R. (2013) - Fiat Industrial to move tax home to UK; Financial times

9) Malan, A. (2011) – “Al via piani di investimento per 5 miliardi negli impianti italiani”; Il Sole

24ore

10) Gerosa, F. (2009) – “Il Qatar paga solo 80 euro ad azione ordinaria, Volkswagen crolla”;

Milano Finanza

11) Bagnoli, R. (2009) – “Effetto incentivi, Fiat vola in borsa”; Corriere della Sera

12) McCurry, J. (2010) – “Toyota president Akio Toyoda ‘very sorry’ for safety recalls”; The

Guardian

13) Fiat spinoff; Milan stock exchange;

Website: http://www.borsaitaliana.it/notizie/sotto-la-lente/spin-off-fiat120.htm

14) Vlasic, B. (2011) – “Chrysler Pays Back Rescue Loan”; The New York Times

15) Renault registration document (2011)

Website:http://group.renault.com/wp-content/uploads/2014/07/renault_

_2011_registration_document.pdf

16) Trudell, C. and Higgins, T. (2011) – “Chrysler Group’s UAW Members Approve Four-Year

Labor Contract”; Bloomberg Business Week

17) Cole, R. E. (2011) – “What Really Happened to Toyota?”; MIT Sloan management review

42

18) ACEA Press Release (2012)

website:http://www.acea.be/press-releases/article/passenger_cars_registrations_-

7.7_over_five_months_-8.7_in_may

19) Sanderson, R. (2013) – “Fiat scraps dividend to save money”; Financial Times