MILAN -- Fiat and General Motors are still in talks to resolve a row over the Italian group's option to sell its ailing car unit to GM, even though a mediation period ended without a deal, sources said on Friday.

"Just because the mediation has ended, it doesn't mean there are no talks any more," one financial source said. "The communication channels between Fiat and GM are still open."

The two companies have long been at loggerheads over the validity of Fiat's put option to sell its car unit to GM, with GM arguing that moves made to keep Fiat Auto going through a crisis changed the company and so invalidated the put.

GM started a mediation process in mid-December to settle the spat, but the 30-day period ended at midnight on Tuesday without an agreement.

Fiat says the put is valid and can be exercised any time from Wednesday. The fact Fiat did not immediately exercise the put and that GM did not take the issue straight to court suggested talks were continuing to find a friendly solution.

Investors had expected GM to pay Fiat about $2.3 billion (1.8 billion euros) to annul the put so it can avoid buying another loss-making, indebted carmaker while it is trying to cut costs and jobs to pull GM Europe back into profit.

On Friday, Fiat Chief Financial Officer Luigi Gubitosi met the combine-to-component group's creditor banks in Milan but was expected to discuss strategy rather than the GM issue.

The banks gave Fiat a 3 billion euro loan in 2002 which can be converted into equity from September if Fiat does not pay it back or change the terms of the deal. The option to shed Fiat Auto was seen as a key backing for the loan, bankers have said.

ROME (AP) -- General Motors Corp. agreed Sunday to pay Fiat SpA $2 billion to resolve a contract dispute, allowing the U.S. carmaker to divest its stake in Fiat's troubled auto unit and revise the companies' business relationship.
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The agreement dissolves a five-year partnership between Fiat and GM, but does not entail a complete separation, they said.

Detroit-based GM will return its 10 percent stake in Fiat's auto division and the two carmakers will dismantle their joint venture that manufactures engines and transmissions. However, the companies will continue to cooperate on engine production, development of vehicle programs, and other fields.

The dispute centered on a so-called "put option" included in the 2000 agreement, which gave Fiat the right to demand GM buy the rest of the car unit.

At Fiat headquarters in Turin, Chairman Luca Cordero di Montezemolo praised the agreement as a "a positive and excellent sign for the future."

He said Fiat's threats to force GM to buy out the auto division had been real -- and imminent.

"If we had not reached the agreement we would have had a long legal battle, because this week we would have started the processes to exercise the put option," Montezemolo said.

In a conference call Sunday, GM Chairman and Chief Executive Rick Wagoner called the deal "a fair and equitable agreement" that "gives each of us more freedom to act in today's competitive environment."

He also said the deal lets GM "avoid a likely protracted and acrimonious legal solution to the case."

"We felt we had a very strong legal case," Wagoner said. But "one never knows for sure when one enters the legal arena."

GM Chief Financial Officer John Devine said in the conference call that two-thirds of the settlement would be to cancel the put option and one-third covers GM's purchase of assets.

The company plans to take an $840 million charge, or $1.49 per share, to cover the payments.

Fiat CEO Sergio Marchionne detailed the proposal -- negotiated with GM officials in Detroit -- at a Fiat board meeting earlier Sunday.

He said Fiat sees no change to its 2005 financial targets after receiving the payment. Fiat is forecasting a small operating loss at its auto unit in 2005, as well as a group loss.

Fiat said in a statement that 1 billion euros ($1.29 billion) will be paid immediately and the rest was expected to be paid over 90 days.

Having to honor the option would have been deeply damaging for GM, which announced plans last year to cut about 12,000 jobs in Europe in a bid to save about $600 million a year. For Italians, Fiat is a national icon and was for decades the source of enormous pride, so the prospect of selling it off to foreigners would have been a severe psychological blow.

Montezemolo said he even consulted Prime Minister Silvio Berlusconi about the deal, and the premier said he was "very satisfied" with it.

Analysts were casting the clash as a poker game in which the struggling Fiat was using the threat of the option as pressure to extract a hefty cash settlement from GM. Experts had estimated the value of any agreement to be as much as $2.6 billion. The impasse had also raised the prospect of GM mounting a legal challenge in a U.S. court.

A period of mediation that began Dec. 16 ended this month without an agreement, prompting speculation that Fiat was pushing for more money than GM was willing to pay. The companies also have a joint ventures in parts purchasing.

Fiat Auto, which accounts for 40 percent of the Fiat group's revenues, has $10.4 billion in debt. The company would welcome a cash payment as it aims to post a group net profit of more than $651 million by 2006.

As part of its efforts to return to profitability, Fiat shuffled management at its auto unit last year and is launching new models. But Marchionne said in October that new models were not boosting revenues as much as hoped.

Fiat claimed the option was valid and rejected GM's contention that the Italian company might have breached the agreement through a recapitalization of Fiat Auto Holding BV and the sale of a 51 percent stake in Fiat Auto's consumer finance division.

Earlier this month, Turin-based Fiat said that the option could be exercised through July 24, 2010. The company had declined to say when it might exercise the option.

When I heard of the $2 billion payoff to Fiat I was enraged beyond belief. I called the General Motors negotiators every name I could think of. I wrote the team must include Santa Claus, Fozzie the Bear (Kermit's low-IQ sidekick), and Dopey, the Dwarf friend of Snow White. Who else could have made such a dumb deal? I was insulting for I believe their action threatens the survival of GM.

That's not the way to write, so let me try and criticize this $2 billion in tribute coldly.

The $2 billion handed to Fiat could be enough to turn GM around. It is enough to buy a rear-drive platform for the Cadillac DeVille and a big Buick, plus a hybrid for Chevrolet. It's enough to tool a plant for five-speed automatic transmissions so Bob Lutz's new models don't have to carry outdated four-speeds, with enough money left over to add XM radios to a year's production.

Next time the GM people have to negotiate, with anyone, even the UAW, they should all stay home. Hire Donald Trump. He knows how to say "No."

Certainly the initial deal was a disaster from the start but we're not talking about that. We're talking about the $2 billion being paid to Fiat to allow GM to get out of a clause that could have forced them to buy the entire Italian company at Fiat's request.

1. GM executives say the requirement to purchase Fiat was no longer valid and they would have won in court. But they paid $2 billion, anyway. Who wants a long court fight? Does that make sense?

2. Fiat was broke, up against the wall, needing cash badly.

3. Had GM said "no" or held out for a reasonable ransom, Fiat had three choices: take what money it could get, do nothing, or demand that GM buy Fiat. Two out of three options favored GM.

4. Had Fiat tried to force a GM takeover, GM would have gone to court. This would have taken years with appeals while Fiat desperately needed money. GM could say: "Go ahead. We'll be in court ten years. You likely will lose. But even if you win you will be out of business before you win. And if by chance you save yourself, you won't want us to take over, anyway."

Fiat might have taken what they could get, gone bankrupt during the case, or even recovered and then quit seeking a GM takeover. Again, two of three for GM (the bad scenario for GM would be for GM to lose the case as Fiat went bankrupt.)

5. Then GM may have won the case so that's 50-50.

6. And even if GM lost, it would be many years before it was settled and time cures or changes many problems.
Look, you are buying a house. The guy you are buying it from has the sheriff at his door with an arrest order for non-payment of child support. There's also an IRS agent with an arrest order for non-payment of his income tax. They have foreclosure orders and an auction date is set on the property. Do you think you have to pay top dollar to get the house?

7. Understand, Fiat people did not want to be owned by GM, and I personally question if the Italian government, in the end, would have allowed its largest manufacturer to be owned by a foreigner.

8. And then GM gives back the ten percent in Fiat stock it owned. GM paid $4.4 billion ($2.4 to start in stock and $2 billion in cash to get out) and they didn't even keep the stock just in case Fiat recovered?

GM apparently likes to say they needed the Fiat deal to get diesel engines for its European subsidiary. It seems GM negotiators (Santa, Fozzi and Dopey) missed the Harvard MBA course, titled Cows/Milk 301, which taught that you don't have to buy a cow to get a quart of milk.

You can buy rights to engine design, or buy engines or joint-venture production. I remember a half-century ago when GM had the only automatic transmissions and sold them to Packard and Lincoln. Today if you want to build a hybrid you can license the tricks fromToyota. In fact, Ford was in the same position in Europe needing a diesel. Ford called Peugeot, which had a fine diesel, and they made a deal. As I understand it, Peugeot put up the diesel and Ford put up money and they built a joint plant turning out the engines.

Oh yes, we'd been hearing for years that another GM disaster, the Isuzu purchase, was fine because GM got diesel technology, small stuff, too, not just the big-truck diesels. Apparently not.

GM also likes to say they both saved zillions of dollars with joint purchasing and parts-making. Frankly. I don't believe the savings figures, especially when both Fiat and GM Europe are losing their shirts.

The only conclusion is that the Fiat leadership picked GM pockets and made the Detroiters look like fools.
How many times will GM leaders repeat these catastrophes?

The ongoing upheaval at Fiat SpA has now claimed Martin Leach, former Ford Europe chief who had been the head of Maserati. Reuters reports that Leach has been displaced by Karl-Heinz Kalbfell, who now heads Alfa Romeo. Fiat SpA chairman Sergio Marchionne has been shuffling personnel since last week's agreement with General Motors that put an end to Fiat's put option, which would have allowed Fiat to dump its automotive operations on GM. With GM out of the picture and $2 billion in its pocket, Fiat is restructuring to link Maserati with Alfa Romeo. Last week, Marchionne presided over the sale of Maserati from Ferrari (of which Fiat owns 50 percent) to Fiat Auto. Marchionne also gave walking papers to Herbert Demel at Fiat after less than two years on the job. The most recent moves, with Leach departing and Kalbfell adding Maserati to his duties, leaves many outsiders wondering what the next move at Fiat may be.

Disgruntled shareholders zeroed in on falling earnings, quality problems and scandal in the Mercedes-Benz sales organization in Germany during the company's annual meeting in Berlin, and blasted DaimlerChrysler chief executive Juergen Schrempp for failing to protect the German-American automaker's most important asset - the three-pointed star.

Thomas Meier, a fund manager with Union Investment Fund, a major German fund, warned that the poor quality of the Mercedes cars throws a shadow over company in the long run. "The problems at Mercedes and Smart are entirely management's fault," he suggested.

Klaus Kaldemorgen, a fund manager with DSW, a subsidiary of Deutsche Bank, Germany 's most influential financial institution, said the drop in the earnings of the Mercedes-Benz brand, which is critical to the company's stability and success, was troubling. The voluntary recall of 1.3 million Mercedes-Benz vehicle and the heavy losses at Smart, Mercedes' small car subsidiary, only underscored the problems, added Kaldemorgen, who was cheered several times as he spoke.

"Mercedes-Benz is no longer an icon," said another shareholder during the daylong meeting staged at the Berlin Messe, or convention center, on the western edge of the German capital.

Promises, promises

Another shareholder noted that at the time of the merger in 1998, stockholders were promised a company with Chrysler's efficiency and Mercedes-Benz quality. What shareholders got was a company with Chrysler's quality and Mercedes-Benz efficiency, he noted pointedly.

Schrempp tried to assure shareholders that the company was doing everything in its power to improve Mercedes-Benz quality and to boost Mercedes-Benz's earning power, which has fallen dramatically since the middle of 2004 and will take another hit in the first quarter of 2005 as automaker writes down part of its investment in Smart. It was also less expensive to keep building Smarts, which help recruit young customers to the Mercedes-Benz, than to shut it down, he added.

Schrempp also said to DaimlerChrysler shareholders that the company was doing all that it can to investigate misconduct and to protect the integrity of the organization, which is responsible for sales of Mercedes-Benz brand cars, vans, and trucks in the vital German market.

The Berlin-based sales organization has more than 17,000 employees, Schrempp noted, and fewer than ten have been implicated in a new scandal involving kickbacks to distributors. The sales organization not only controls distribution of cars and trucks to dealers but also operates a network of more than 40 company-owned retail dealerships that are located in major German cities.

Schrempp noted that DaimlerChrysler launched an internal investigation into the charges back in October following an anonymous tip from an employee. The executive in charge of the sales unit was replaced in February after he was implicated in the scandal and Schrempp said the information collected during the internal investigation has been turned over to government prosecutors in Stuttgart, where they will determine whether to bring criminal charges against the officials dismissed by DaimerChrysler.

The fact that the matter has been turned over to prosecutors also meant that he had to limit his comments on the specific charges, he said.

Senior DaimlerChrysler officials said privately that the scandal basically involved what one described as disorganized crime, involving kickbacks for selected distributors and misappropriation of company assets for personal use. The company has turned up no evidence that any of the discredited executives had links to the organized crime that traffic in stolen vehicles across Eastern Europe.

Chrysler comeback overshadowed

The problems at Mercedes-Benz also overshadowed any discussion of the comeback of the Chrysler Group, which had been a frequent target of Schrempp's critics in the past.

The turnaround rested on a strong foundation that will continue to produce solid results in the years to come, DaimlerChrysler AG's top executive told shareholders during the German-American automakers annual meeting in Berlin.

"I think we have excellent prospects" for Chrysler, Schrempp said in response to a question from one of the shareholders. Chrysler, he added, is getting ready to produce mid-size and small cars that he assumes will be as good in their own ways as the 300, Schrempp added.

Schrempp also said he believed that as more of Chrysler's new models, such as the Jeep Commander, which is due out next fall reach the market, the company's revenues and earnings will improve more in 2006 and 2007.

Chrysler has clearly benefited from the investments by DaimlerChrysler earlier in the decade at time when the future of the group appeared bleak, Schrempp said. "Despite some huge losses, we made these strategic innovations," such as the Stow 'n Go folding seats now found on the Chrysler minivan, he added.

The DaimlerChrysler CEO also noted that some of the company's competitors would not have spent $400 million on such as innovations out of concern for the short-term profitability. "At DaimlerChrysler we always think about the long-term," he said. Nevertheless, he also said he worries about the intense competition in the North American market.

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