Rival targets Dana Corp. in $4.4 billion hostile takeover bid

7/9/2003

Toledo's largest corporation and one of its oldest businesses is under attack.

A smaller Michigan automotive parts supplier yesterday revealed it intends to launch a $4.4 billion hostile takeover of Dana Corp., a global auto parts firm on 4500 Dorr St.

ArvinMeritor, Inc., will offer Dana shareholders $15 a share, amounting to $2.2 billion in cash, and would assume $2.2 billion in debts for the Toledo firm.

The unsolicited bid directly to owners of Dana's 149 million shares was made after month-long efforts to negotiate a merger were spurned by Dana's top executive and board.

The top executive for the Troy, Mich., auto supplier - which is on a quest to more than double annual sales from $6.9 billion - readily admitted he would rather negotiate a sale through Dana's board instead of doing a hostile takeover.

“We are very, very hopeful that Dana's management and board will sit down and talk to us,” Larry Yost, ArvinMeritor's chairman and chief executive, said during a conference call. He later told The Blade in an interview: “We're very focused on Dana right now.”

Either way, Toledo could lose its largest company, a $10.3 billion firm that is readying to celebrate its centennial next year. The Fortune 500 company has more than 700 employees in metro Toledo and 60,000 worldwide.

It was unclear what might happen to Dana's headquarters, its facilities, its $30 million technical center being built in Maumee, or its employees should the takeover be successful. Those items are among what ArvinMeritor wants to discuss with Dana, Mr. Yost said. He said his firm has a track record of keeping the “best and brightest” after acquisitions.

Dana executives declined to comment, with spokesmen saying ArvinMeritor's announcement is being treated as an offer, so officials have entered a “quiet period” in which laws do not permit them to talk publicly about the possible transaction.

Joe Magliochetti, Dana's chairman and chief executive, addressed nervous employees at the company's headquarters and told them the takeover offer would be reviewed, a spokesman said.

In a public statement, Dana urged shareholders to hold off on accepting the offer until its board could consider it and make a recommendation within 10 business days.

The news sent Dana's stock soaring in extremely heavy trading. The share priced closed at $16.20, up $4.18 and higher than the ArvinMeritor offer. The would-be buyer's stock slumped, however, as is common in takeover bids.

ArvinMeritor said it would be willing to raise the deal's price or offer a combination of cash and stock, and the acquisition would “significantly” add to earnings in the first year.

Mr. Yost said massive consolidation in the shifting auto-parts industry is inevitable in order to compete, and his firm believes the two companies make ideal partners and could trim $200 million in costs a year.

“Together, we'll be a top five global auto supplier with approximately $17 billion in sales,” Mr. Yost told analysts, shareholders, and reporters during yesterday's conference call.

Dana last year was ranked at No. 13, down from No. 11 in 2001, and ArvinMeritor was at No. 16, down one spot. On the Fortune 500 list, Dana is No. 182 and ArvinMeritor is No. 266.

Analysts and others in the industry questioned how prudent it would be for ArvinMeritor to assume so much debt. Part of the deal would require it to refinance Dana's $2.2 billion in debt, and the combined company would have $3.3 billion in underfunded pension and other retirement liabilities.

Anti-trust issues are another concern for analysts. While Dana makes axles, driveshafts, and other parts, ArvinMeritor builds some of the same items along with others such as door modules and roof systems. The combined company would monopolize or dominate some markets, including heavy and medium-duty rear axles used on semitractors and buses.

With Dana's stock trading at a higher price than the offer, ArvinMeritor may have to raise its tender or another bidder may enter the fray, Merrill Lynch analyst John Casesa said in a report. A financial sponsor wanting to split up Dana's operations could surface as another bidder, Mr. Casesa said.

Dana's answer to ArvinMeritor, meanwhile, likely will lead Wall Street to believe that the takeover's odds are lower than thought, said Robert L. Chapman, Jr., managing partner of Chapman Capital LLC, a Dana institutional shareholder from El Segundo, Calif. Chapman Capital cut its Dana holdings nearly in half yesterday to 120,000 shares to take advantage of the higher price.

Collectively, Dana directors and executives have 1.6 percent of shares in stock and options, so they would not benefit from an acquisition, Mr. Chapman said. Dana would be better off, he added, to remain independent.

“Hostile takeovers are a prize fight,” Mr. Chapman said. “Generally speaking, it's wise to speculate that whoever just got punched will come back with an even stronger uppercut to the hostile bidder.”

It's possible, but not probable, that Dana could in turn attempt to acquire ArvinMeritor, said David Siino, an analyst with Gabelli & Co. Inc. of Rye, N.Y.

The attempted takeover will force Dana, which has done a good job with its restructuring, to consider alternatives officials may not have wanted to look at, Mr. Siino said.

Dana started a widespread restructuring in 2001 that has resulted in selling off chunks of its Dana Commercial Credit subsidiary. The supplier is wrapping up the restructuring, which ultimately will trim its worldwide workforce by a fifth and shed about 40 facilities.

“The ball's certainly in Dana's court,” Mr. Siino said. “The eyes of shareholders are on them.”

He added: “It would be hard to see them being part of another organization.”

Toledo Mayor Jack Ford had a similar reaction.

“You say Dana, you think Toledo,” he said. “It's a huge loss anytime a Fortune 500 company might leave.”

Added Mayor Ford: “It's our prestige as a city that's also on the line.”

Two years ago, ArvinMeritor and Dana discussed combining their replacement-parts operations, said Mr. Yost, who declined to say why those talks fell apart.

ArvinMeritor's advances have repeatedly been rebuffed between an initial June 4 telephone conversation with Mr. Magliochetti and one yesterday about 15 minutes before the company publicly announced its intentions, he said. Originally, it offered Dana $14 a share.

The suburban Detroit firm said it filed a lawsuit yesterday against Dana and its board in the Circuit Court for the City of Buena Vista, Va., saying board members breached their fiduciary duties to shareholders by rejecting proposals without a meeting. Dana, though based in Toledo, is incorporated in Virginia.

Mr. Yost said financing is not an issue for ArvinMeritor, which has not yet released details of its financing plan. The deal is contingent on regulatory approval, which Mr. Yost believes would be granted, and the removal of Dana's anti-takeover provisions.

Dana's “poison pill,” as such provisions are called, would be triggered if ArvinMeritor acquires 15 percent or more of company stock. Other stockholders would be able to buy shares at a sharply discounted price, increasing the number of outstanding shares. ArvinMeritor currently holds nearly 1.1 million Dana shares, or less than 1 percent.

Poison pills are more of a way for companies to get room to negotiate deals, not deter takeovers as some believe, Mr. Chapman of Chapman Capital said.

In this case, ArvinMeritor designees could make a bid to control's Dana board and eliminate the poison pill, he said.