Last night on CNBC’s Fast Money we discussed media reports that General Motors (GM) had rebuffed a recent overture by Fiat Chrysler’s CEO to merge, watch here:
The idea may sound insane after what has been one of the most tumultuous periods for the auto industry in decades, and co-panelist FM Karen Finerman highlighted the fact that mega-auto mergers have had a checkered past, most notably Daimler Chrysler’s which was the largest cross border deal ever up until 1998. Is the notion of a mega-merger a tad “bull market”?? Well the rationale may be more focused on the next bear market, or possibly attempting to get in front of the largest secular shift in the automobile business, possibly since its inception over a century ago, where it appears the technological focus is quickly moving away from engines running on fossil fuels and towards microchips and batteries. Electric and driver-less cars may appear to be Jetson-esque sort stuff, but its apparent that some of the smartest technological minds of our times have set their sites on it (Elon Musk, Larry Page and even the peeps in Cupertino).
If I were an investor or a c-level executive in the auto industry, knowing that just 6 years ago the entire U.S. auto industry for all intents and purposes was a ward of the state, I would be focused on the next downturn and trying to be well positioned for a global recession and or the potential of upstarts like Tesla (TSLA) to massively disrupt the existing status quo. The cost structures for GM and Ford are way to high (given the breadth of offerings) to combat another crisis like we saw in the last decade, and with competition from local competitors in growth regions like China, the timing of such merger musings could make sense in an effort to dramatically cut costs.
As for GM, the stock has massively under-performed the S&P 500 since its late 2010 IPO, the SPX is up 80% since, while GM is flat, ugh. For those who think bold moves are coming in the auto industry in the form of mergers or joint ventures, and GM will be in the middle of it, 30 day the money implied volatility in GM options (Blue line below, the price of options) are as low as they have been, well ever, making long premium directional views attractive in place of stock, despite very low levels of realized volatility (white line below, how much the stock has been moving):
Its my sense that any consolidation in the auto industry will not be done out of position of strength, but likely the fearful foresight of industry execs who see the ground moving quickly below their feet.