A Peugeot and Mitsubishi Deal: Why?

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Indeed, many doubt Mitsubishi is the right partner for the French carmaker. For Peugeot, Mitsubishi brings SUV production experience, a presence (albeit small and shrinking) in the U.S., and nascent electric vehicle technology. The latter is particularly attractive: This year, Mitsubishi became the first major automaker to begin selling electric vehicles when it began taking orders for its i-MiEV electric car. Teaming up with Peugeot could boost sales of EVs and speed up cost reductions. Mitsuru Kurokawa, a Tokyo-based analyst with the Global Automotive Group, says Peugeot may also be interested in Mitsubishi's minicar know-how and presence in southeast Asia.

worth the money?

But is any of that—or all of it together—worth $3 billion or more? For one thing, in markets where Peugeot lacks a presence, it's hard to argue that Mitsubishi is strong. In the U.S., for instance, Mitsubishi's November sales slipped 43%, to just 2,925. A bit like Peugeot, Mitsubishi lags rivals in China, the world's biggest auto market. And in India, another market with big potential and where Peugeot has been dragging its feet for over a year on a decision to open a 100,000 annual-capacity car plant, Mitsubishi isn't a leading player.

Critics add that the two could easily deepen ties without Peugeot's needing to spend so much on the Japanese company's stock. After all, they signed an agreement on electric vehicles in September, work together developing SUVs, and have a production joint venture in Russia.

And Mitsubishi Motors' stock isn't even cheap. While it has fallen sharply in recent months, before today's surge its market capitalization at $7.5 billion was roughly double that of Mazda (MZDAF). That's despite Mazda's higher profits and annual sales, and an arguably better lineup of cars. Analysts say Mitsubishi is costly because it is a favorite of Japanese retail investors attracted to the name and the implicit guarantee that Mitsubishi group companies will come to its rescue in times of trouble.

The ability of the two companies to build on a deal is also open to question. It's not as if either company comes to the table in a strong position. Peugeot suffered a $1.25 billion operating loss during the January-June half, and only appointed Varin as chief executive in June after firing Christian Streiff three months earlier. Last month, Varin said the company aims to cut debt by a quarter in 2010—something that could be difficult if it has to raise money to buy Mitsubishi stock.

Moreover, analysts warn that Peugeot's business prospects are likely to get worse before they get better. One reason: 2010 will be tough because the European market will likely suffer a sales hangover once the impact of cash-for-clunkers and other government programs supporting the auto industry wears off.

fears of management chaos

The Japanese automaker is even weaker. Under CEO , Mitsubishi has won plaudits for its bold plans for electric vehicles. But with sales depressed in most markets, Mitsubishi expects worldwide sales to plunge 17%, to just 836,000 vehicles, during the current financial year, down from 1 million last year.

Yet while Peugeot would bring financial and scale benefits, others worry that another set of foreign owners will create a new set of tensions and confusion within the company just four years after Daimler cashed out. "This repeated change in the management creates chaos [inside the company]," says Koji Endo, an analyst at Advanced Research Japan in Tokyo.

A handful of Mitsubishi group companies, which own about a third of the Japanese automaker, may have most to gain from Peugeot taking control. In 2005, Mitsubishi Corp., Mitsubishi Heavy Industries, and Mitsubishi UFJ Financial Group received about $3 billion of preference shares as part of a $5.2 billion Mitsubishi Motors bailout. Beginning next year the automaker must start paying $230 million annually in dividends—something it may struggle to afford. The fresh investment would likely be used to redeem the preference shares, enabling the group companies to avoid pushing the automaker toward a possible bankruptcy or facing a standoff with their own shareholders if they were to waive the payments. "The solution is to find a buyer like Peugeot," adds Endo.

With David Welch in Detroit and Carol Matlack in Paris. Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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