Morningstar senior equity analyst Richard Hilgert said in a note that total volumes of FCA and Peugeot, including China joint venture partners, amounted to 8.7 million vehicles a year ago, ranking the eventual combined group fourth behind Volkswagen, Toyota and the Renault/Nissan Alliance, each at more than 10 million units.
European automakers have been looking to mergers and alliances for years to share R&D costs and tackle the issue of overproduction on the continent.
The merger decision comes about five months after a similar deal with French rival Renault fell apart. The merger will take place under a Dutch parent company with a balanced governance structure across the two shareholder groups, including a majority of independent board members. FCA brands include Abarth, Alfa Romeo, Chrysler, Dodge, Fiat, Fiat Professional, Jeep, Lancia, Maserati, and Ram Trucks, while PSA brings Peugeot, Citroën, DS, Opel and Vauxhall brands to the table.
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According to Marco Leonardi, an economist with the Department for the Study of Labor and Welfare at the State University of Milan, the deal makes sense on several levels.
The merger could bolster PSA Groupe in efforts to return to the USA market, while Peugeot, Citroen, and Opel could help bootstrap Chrysler's presence in Europe and Eurasia, while supporting its continued growth in South America.
Fiat Chrysler shares spiked on the news.
The boards of directors from both companies are expected to agree to a binding memorandum of understanding before the end of the year.
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PSA's Carlos Tavares will be the CEO of the combined entity while FCA's John Elkann will be chairman. The U.S. and French governments have been briefed on the deal.
The merger plan comes as the auto manufacturing sector - which accounts for 5.7 percent of global GDP and eight percent of goods trade - shrank by 1.7 percent past year by volume of vehicles produced, according to the International Monetary Fund. It held extended talks with Group Renault over a possible partnership but those talks broke down after the two firms could not reach an agreement, thought to be hampered by Renault's alliance with Nissan and the French government.
Manley called it "an industry-changing combination", and noted the long history of cooperation with the Groupe PSA in the industrial vehicle sector in Europe.
The merged company will be headquartered in The Netherlands and have shares listed on France's Euronext and Italy's Borsa Italiana exchanges, as well as the New York Stock Exchange.
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A combination with PSA would give FCA access to the French group's CMP modular platform, which was launched in 2019 for Peugeot's e-208 compact city auto, and donated for Opel to build the Corsa-e mini.