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Is more auto-supplier consolidation good?


Acquisitions have benefited some parts firms, such as Johnson Controls, operator of this plant in Tennessee, and a member of the group one analyst calls specialists.

file / via Bloomberg News Enlarge

There are examples of success in the rampant consolidation in the auto-parts industry, such as Johnson Controls Inc. and Lear Corp.

Both suppliers of automotive interiors, which have local operations, have had hiccups - Lear has closed a number of plants, including a 323-employee Bowling Green factory that made parts including between-seat consoles for light trucks - but they have done well overall in their quest to be global players, some analysts say.

Then, there are companies such as frame-maker Tower Automotive Inc., which had to take on a lot of debt to reach such global status.

Junk credit, management turmoil, and even declining to bid on a key Ford Explorer contract for fear that payment wouldn't be adequate have plagued Tower, said auto analyst Joe Phillippi, president of AutoTrends Consulting in Short Hills, N.J.

But further consolidation among parts suppliers isn't necessarily required, another analyst said, and each proposal has to be weighed on its own merits.

“It's one of those things [that] in some cases it makes sense, but in other cases it doesn't,” said Marc Santucci, supplier industry analyst with ELM International Inc. in East Lansing, Mich.

“I have a problem with buyouts just for the sake of buyouts.”

Consolidation has become a central issue as Toledo's Dana Corp. and ArvinMeritor Inc. of Troy, Mich., fight for control of the larger Dorr Street firm.

The Michigan rival is trying to woo Dana shareholders with a $15-a-share tender offer without the approval of the company's board, a bid that expires Aug. 28 but could be extended. (ArvinMeritor has increased the total value of the offer from $4.4 billion to $4.6 billion, saying there is more Dana debt to be assumed than previously known.)

From the standpoint of ArvinMeritor, itself the result of a 2000 merger between Arvin Industries Inc. and Meritor Automotive, widespread consolidation is inevitable in order to compete as automakers reduce what they will pay suppliers and how many suppliers they will deal with.

A combined Dana and ArvinMeritor could trim $200 million in costs annually and bring in about $17 billion in sales, exceeding the Michigan firm's pledge to reach $15 billion in revenues by 2005.

For its part, Dana - which is selling off assets in the aftermath of its own spotty 1990s merger binge - contends bigger isn't necessarily better.

It has, however, admitted to pursuing a “two-part corporate transaction” but has not released any details.

A combination of Dana, with $10.3 billion in annual revenue, and ArvinMeritor, with $6.9 billion, would result in illogical fits with some operations and potential anti-trust issues with others, Dana said.

It specifically cited axles and other products for medium and heavy-duty trucks.

One automaker, meanwhile, is questioning how successful consolidation has been overall, because its direct suppliers have declined more than 10 percent since 1998 yet the number of factories shipping parts has dropped by less than 5 percent. Overhead and costs haven't been cut, observed a spokesman for the automaker, who asked to remain anonymous.

Still, some industry experts suggested, some automakers and other parts customers are leery of not being able to have choices on parts in supplier contracts.

On the flip side, automakers like Honda Motor Co. and Toyota Motor Corp. that have focused on expanding their own operations are better off than the Big Three, who have been involved with mergers, said Mr. Santucci, the analyst.

Suppliers, another analyst said, have evolved into two groups: specialists like Lear, Johnson Controls, and Findlay's Cooper Tire & Rubber Co., and conglomerates like ArvinMeritor and Dana.

Specialists have been more successful, making deals for small “bolt-on” acquisitions more likely to create value than “big-bang” mergers among conglomerates, noted Merrill Lynch analyst John Casesa. “If anything,” he said in a report, “deconsolidation by conglomerates to create new specialists is more likely.”

Of a dozen suppliers in Mr. Casesa's report, only ArvinMeritor is seeking size. Some, like Dana, Visteon Corp., and Delphi Corp., are selling off non-core assets in an effort to specialize, while some others are concentrating on niche acquisitions or deals related to their core product lines, the report said.

Many small and medium-sized companies had to assume considerable debt in their quest to become global players.

One was Tower, which, as a result, has found price-cutting pressures from automakers particularly painful, said Mr. Phillippi, the analyst. “They piled on a lot of debt, and that debt has been a real challenge,” he said.

ArvinMeritor would need at least $3.7 billion in financing to acquire Dana, and the company hasn't yet secured that funding, it has said. The extra borrowing would put its debt-to-capital ratio at close to an unwieldly 90 percent, some analysts say.

Between having that much red ink and the possibility of having to sell overlapping assets makes the suggested benefits of ArvinMeritor's bid for Dana harder to fathom, some industry experts said.

“It's hard to see them when you look at that amount of debt,” Mr. Phillippi said.

Stock prices for a number of supplier companies are trading as low as Dana's has, making them potential targets for other hostile takeovers.

(Dana's stock, which trailed its industry peers' average in the past year, has hovered at or above the $15-a-share mark since ArvinMeritor announced its intentions.)

For example, stock in Tenneco Automotive Inc., which has headquartered its automaker parts business in Monroe, is trading at about $5 a share after plunging to $2.01 from $7.50 nearly a year ago.

A spokesman for the $3.5 billion company declined to comment.

Cooper Tire's stock has fared better, although it remains below a 52-week high of $22.17 from roughly a year ago, closing Friday at $17.92 a share.

Along with making auto parts - it is the world's largest supplier of sealing products - the $3.3 billion firm also builds tires mostly for the replacement market, making the company well positioned, said spokesman Roger Hendriksen.

“We have no concerns about being a takeover target,” said Mr. Hendriksen, adding that smaller companies may be pursued.

More takeover attempts are possible, but many suppliers have so much debt that, as interest rates rise, making a deal would be too risky for them, Mr. Phillippi said.

Then again, Mr. Santucci said, Dana appeared to be an unlikely takeover target before ArvinMeritor's bid, so anything is possible. “I guess it doesn't matter how big the company is anymore,” he added.

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