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GM, Fiat Agree to $2.4-Billion Alliance for Cutting Costs


ROME — Fiat, once Italy's most potent industrial empire and still its biggest employer, bowed to worldwide competition Monday and handed a 20% stake in its auto division to General Motors Corp., forming an alliance to cut costs and seek new markets for both companies.

The proposed deal, announced at Fiat headquarters in Turin, capped years of courtship of the proudly independent Italian company, the world's No. 7 auto maker, by nearly all its major rivals. Fiat would get a 5.1% stake in GM, the Detroit-based global industry leader, while the two set up joint engine-building, purchasing and financing ventures in Europe and South America.

Gianni Agnelli, Fiat's 79-year-old honorary chairman, said the new allies expect to raise combined sales from 8.5 million vehicles to 11 million a year while retaining their own assembly lines, brands and identities. The share swap, valued at $2.4 billion, covers Fiat's Alfa Romeo and Lancia marques but not its Maserati and Ferrari division. The new partners are reportedly planning to consider reintroducing the Alfa Romeo brand in the U.S.

"The two objectives we set for ourselves were finding the strongest possible ally and keeping our autonomy," Agnelli said, asserting that the alliance would ensure Fiat's survival after years of slipping sales in a market dominated by global heavyweights.

"The deal is structured in a way that leaves control of the company in our hands," said Fiat Chairman Paolo Fresco.

But the announcement was more widely viewed as a milestone in the Agnelli family's decline as Italy's premier power brokers and as a possible first step toward the surrender of its auto division. GM was given the first right to bid on the rest of Fiat Auto if Fiat decides to sell in the future.

For GM, the move is the latest in a growing number of partnerships with other manufacturers around the world to enter new markets and develop new vehicles faster than the U.S. company could on its own.

Both companies have lost market share or relative position as the advent of Europe's single currency has pushed their rivals to join forces: Renault of France took a controlling stake in Japan's Nissan Motor Co. last year, and Germany's Daimler-Benz acquired Chrysler Corp. of the U.S. to form DaimlerChrysler in 1998. Fiat, trying to keep up, failed in a bid to buy the passenger-car division of Volvo of Sweden, losing out to Ford Motor Co. in January 1999.

"We see [the agreement] as a significant opportunity to reduce costs," GM Chairman John F. Smith Jr. told reporters in Turin. The companies expect to save $1.2 billion by the third year and $2 billion by the fifth year of the alliance, which is subject to approval by U.S. and European Union regulators.

Italy's center-left government encouraged Fiat to accept GM's offer over a bid by DaimlerChrysler to buy all of Fiat Auto in exchange for a 12% share of the German-American company.

Any foreign move into a major industry is a sensitive issue in Italy. But Italian political and labor leaders welcomed the proposed Fiat-GM alliance as the better deal--and the inevitable consequence of Fiat's troubles in a more competitive Europe.

Prime Minister Massimo D'Alema, a former Communist, said the agreement looked at first glance "positive and important." Sergio Cofferati, a top Italian labor leader, called it "a turning point that is good for the Italian economy."

Fiat Auto's share of the once-protected home market has dwindled from a peak of 60% to 39% in recent years as Italy has opened wider to imports. The auto division, which employs 221,000 workers, holds about half the Fiat group's stock value but contributes far less to the group's revenue and profit.

The century-old Fiat group has fallen from the top to 10th place among Italy's richest conglomerates in recent years.

GM shares closed unchanged at $77.81 on the New York Stock Exchange; Fiat's American depositary receipts gained $1.19 to close at $36.06, also on the NYSE.

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