Fiat Fiat Industrial The Value Of A Spinoff Case Solution

2. Problem Identification

The problem that was faced with the giant conglomerate was that the market did not fully realize the value of all the businesses under the Fiat Group. The CEO was of the view that Fiat Group was being valued less as a conglomerate and it was being affected by conglomerate discount. This phenomenon is referred to as the tendency of the market to value a diversified group of companies lower than the value of the sum of its parts (Chen, 2020). This diversification discount can also occur when companies viewed separately are not performing well compared to the overall performance of the conglomerate. Another reason that called for the demerger was that the market preferred companies that focused their attention on core business and gave less preference to diversified businesses.

3. Analysis of the case

The SWOT analysis of the Fiat Group can give us insight into the competitive positioning of the conglomerate and help us figure out if demerger is a viable option. One of the major strengths of being a conglomerate is that in the past the Fiat Group has had multiple mergers, acquisitions, and joint ventures which have created business synergies, cost savings, and expansion beyond borders (Group, 2010). As a result, the Group has profited from its diversified business approach. A weakness to this business model is that a failure of a merger or joint venture can adversely impact the financials of all companies in the group and can result in a conglomerate discount in eyes of the market. Another important weakness of Fiat Group to highlight is that Capital Goods and Automobiles businesses of Fiat have no characteristics in common in terms of innovation, research and development expenditure, competitive environment and potential investor required. By demerging the two business divisions, the businesses have various opportunities separately. As separate entities, Fiat businesses can expand in their own potential markets and spend money according to customer specifications. The threats to the conglomerate are majorly from its Chinese and American counterparts and the business being affected due to the recession of 2008. 

In order to eliminate the effects of conglomerate discount and to increase the value of the business in the eyes of the market, Fiat shareholders approved a demerger plan that would separate the automobile business of Fiat from its other businesses and create a separate company that will be known as Fiat Industrial (RER, 2010). The new company will include CNH Global agricultural and construction equipment manager, Iveco which operates in the trucks and engine maker business, and FPT Industrial which is Fiat’s key player in industrial and marine part technology. The demerger would lead to the creation of two distinct groups, Automobiles and Capital Goods, each of which can focus on their core business which is clearly recognized by the market.