July 25, 2018 / 1:15 PM / in 20 days

Breakingviews - Cox: The Agnellis will miss Marchionne most of all

NEW YORK (Reuters Breakingviews) - After reading a Breakingviews column in January arguing that Sergio Marchionne’s successor as Fiat Chrysler Automobiles chief executive would struggle to defend the car maker’s lead when he retired, Marchionne fired off an email: “This is considered thinking?” It was the kind of challenge I had come to expect since first interviewing him in 2006.

CA CEO Sergio Marchionne attends the celebration of the production launch of the all-new 2017 Chrysler Pacifica minivan at the FCA Windsor Assembly plant in Windsor, Ontario, U.S. May 6, 2016

While he was quick to confront the press, he also proved a jovial guest at dinner debates in Italy and the United States, whether gamely taking his place beside a police chief with two holstered handguns, holding court with fellow Italian executives, or good-naturedly needling Roman politicians. The sparring has, sadly, come to an end with Marchionne’s death at 66 in a Zurich hospital.

But perhaps nobody will miss Marchionne’s instinct to question the status quo as much as the Agnellis, Italy’s first family of industry, whom he served for 14 years. It was a series of family tragedies, not unlike the medical crisis which forced Marchionne’s abrupt exit from Fiat over the weekend, that put him into the driver’s seat at Fiat. John Elkann, the family’s then-28-year-old figurehead, made a wise call to tap the Canadian executive who was born in Chieti, Italy. It led to what may be the most impressive turnaround in automotive history – and an unusually successful relationship between a family and a professional executive.

In June 2004, Marchionne became the fifth Fiat CEO in two years. The business was indebted and struggling. On top of that, he arrived amid a family trauma sparked by the untimely death of Umberto Agnelli, the chairman and grandson of Fiat’s founder. Umberto’s son had been groomed to lead Fiat, but had died of cancer at 33 just a few years earlier. Marchionne’s predecessor, Giuseppe Morchio, had tried to take advantage of the situation to consolidate his power, a move that led to his ouster.

Two years later, in an on-the-record interview at Fiat’s Lingotto headquarters, Marchionne told me he had “underestimated the severity” of Fiat’s problems when he took the job. “But I came here because the family asked me to come. I was 14 when I left this country and the Agnellis are the Agnellis. So, when the family asks you to come and help, you do.”

At the time Fiat had a stock market value of around 5.5 billion euros. Marchionne focused first on turning the core car business around, investing cash he had squeezed out of General Motors, with whom a previous CEO had negotiated a right to sell Fiat Auto, and by arranging a debt-for-equity swap with lenders. Later, he clinched control of Chrysler following a U.S. government-assisted bankruptcy. He separated sports-car maker Ferrari and took it public. He also spun off CNH Industrial, a maker of agricultural vehicles.

The combined equity value of the three companies is now about 60 billion euros. Apart from Tesla, no car company of late has come close to creating that sort of value for its owners. Thanks to Marchionne’s work, the worth of the Agnelli family’s Fiat interests surged from around 1.6 billion euros when he got there to nearly 17 billion in the three companies today. He didn’t just save the Agnelli fortune, he arguably made it.

Marchionne’s illness and death came as a shock. He was, however, already planning to retire from Fiat next year, so the board was in a position to rapidly name his successor: Mike Manley, previously in charge of the Jeep brand. Fortunately for Manley, after masterminding Fiat’s turnaround Marchionne ensured the company was in a state that made him replaceable. FCA’s new boss inherits a company with no debt. Moreover, Jeep is key to Fiat’s recently unveiled five-year plan.

Over at Ferrari, the board named an experienced consumer goods executive, Louis Camilleri, as CEO, a position Marchionne had planned to retain after leaving FCA. Camilleri, a career tobacco seller, may not have Marchionne’s touch at the wheel of a 12-cylinder 812 Superfast, but he knows how to run a corporation.

Though his departure is premature, Marchionne fulfilled the promises he made to Fiat’s owners when he landed the job – and then some. Even in 2006, when his primary concern was to make money, stop burning cash, and “prove we have staying power,” he was thinking about a breakup of Fiat’s conglomerate structure. “There will be a point in time when we will look our valuation and ask whether the pieces fit together,” he told me. “When that time comes we will do the right thing.” And he did.

When we first met at Lingotto, Marchionne was already trying to figure out how to wean Fiat from the high-risk capital-investment cycle that contributed to the bankruptcies of Detroit rivals a few years later. “Making cars is a bloody risky business,” he said between puffs of the Muratti cigarettes he used to chain smoke before giving up over a year ago. “If you screw it up it costs you billions.”

The financial crisis that followed afforded him a path to acquire Chrysler, partly in exchange for know-how and expertise. It also inspired him to pen a 26-page presentation entitled “Confessions of a Capital Junkie”. The paper, dubbed an insider’s perspective on the cure for the car industry’s “value-destroying addiction to capital”, caused a sensation in the industry and with investors, even if it failed to entice General Motors into exploring a merger, which was Marchionne’s hope.

That option is now for Manley to explore. But the decision will be Elkann’s. The FCA chairman, who also oversees Exor, the investment vehicle consolidating the Agnelli family’s 29 percent stake in the car maker and its other interests, is no longer inexperienced, as he was back in 2004. He has spent 14 years working with Marchionne. “For me, he has been someone with whom to share thoughts and in whom to trust, a mentor and above all a true friend,” he said in a statement on learning of Marchionne’s illness. “It has been my privilege to have had Sergio at my side for all these years.”

Under Elkann, Exor has gone beyond Fiat, prevailing in a contested battle in 2015 to acquire Bermuda reinsurer PartnerRe for $6.9 billion. It snapped up Pearson’s stake in the Economist Group to become the largest shareholder of the publisher. The stock has done well, too, clocking up a total shareholder return of nearly 150 percent over the past five years, far outpacing the STOXX Europe 600 Index, according to Eikon.

Much of Exor’s success lay with Marchionne: Fiat shares returned over 300 percent during that same span. Elkann was smart enough, even at a young age, to see the wisdom in handing his family’s most important asset over to a pushy iconoclast. With Marchionne, he proved that after five generations a dynasty can not only preserve, but expand, its wealth.

With Marchionne’s passing, the auto industry has lost one of its most prominent and provocative leaders. But his capital confessions, the trademark black sweater – which he even wore to visit Donald Trump in the Oval Office – and his influence on Elkann and the Agnellis’ global industrial complex will endure.

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