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Fiat builds 'parachute' clause into GM link-up

GM and Fiat were forced into this week's get together by competitive pressures, with each realising its vulnerabilities.

A global new-order was formed two years ago with the creation of DaimlerChrysler. This was followed by the rapid expansion of Ford Motor Company through the purchase of Volvo and other companies, and the recent Renault/Nissan link.

Analysts see a weakness in the GM/Fiat deal because it is viewed as defensive with each side wanting to retain its independence. Both will be hoping the alliance is a sufficient catalyst to bring about the cost savings they need.

This will start with shared component purchasing and new-model design investment, probably running through to savings on distribution and retailing. Details will be revealed later on the extent of the deal, which is open ended.

Fiat has an option to selling the remaining 80% of its car division to GM before the end of 2005 if the alliance does not work out.

Paolo Fresco, Fiat chairman, said the option was a “parachute” to protect Fiat shareholders. “If we want to die, we want to know how,” he said.

In the alliance, GM will invest £1.5bn for a 20% stake in Fiat in exchange for GM common stock worth a corresponding amount. This gives Fiat a 5.1% stake in GM and Fiat Auto an overall value of £7.5bn.

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