Citi Asks: Why Is GM Being Pursued?

In a report published Tuesday, Citi analyst Itay Michaeli maintained a Buy rating on General Motors Company GM, with a price target of $50, after The Wall Street Journal reported that Sergio Marchionne, CEO of Fiat Chrysler Automobiles FCA, had begun contacting hedge funds and others for a possible merger of the two companies.

"The “should GM pursue it?” question is very debatable with history providing both pros but probably more cons. In the coming days everyone will share an opinion as we recently did. But for current and prospective GM investors, the “should they pursue it” debate is less immediately pressing than asking oneself why GM is being pursued, and why GM management has thus far resisted these overtures," analyst Itay Michaeli said.

The pursuit could be indicative of the quality of General Motors' global franchise. This could be because the company "may actually be ahead in the mass-market auto OEM “tech race” to accelerate connectivity (OnStar/LTE, which we’ve previously valued at $7-9bln), electric vehicles (Volt/Bolt), ADAS, autonomous driving (SuperCruise), infotainment, China luxury gains etc," Michaeli stated.

Moreover, General Motors' resistance so far to such overtures could be indicative of management viewing its 2016+ business plan to be on track. This business plan implies EPS of more than $5 in 2016.

In the report Citi noted that either of the outcomes could be positive for General Motors' shares because:

• In case management resists a deal, it would increase investor confidence in its 2016+ plan and LT strategy
• An M&A deal would try to "win strong GM shareholder support" and the company's stock valuation would begin reflecting a premium to that of Ford Motor Company F