'98 acquisition may have put Dana at risk

7/13/2003

Shock reigned when Dana Corp. became the target for a hostile takeover attempt last week, but the Toledo auto supplier's troubles can be traced to 1998, when it became a white knight for another company targeted by a similar bid.

That doesn't mean, however, that Dana is any less well-run than its suitor, ArvinMeritor, Inc., of Troy, Mich., industry experts said. Both have had problems in recent years as they try to make past acquisitions work, contend with weak auto-parts demand, and try to shore up faltering stock prices, they said.

Some go so far as to criticize the proposed $4.4 billion deal that would pile $2.4 billion of new debt onto ArvinMeritor, even though experts agree that consolidation in the auto-parts industry is inevitable as automakers reduce what they will pay suppliers and how many they will deal with.

“Both companies have endured weak growth and several rounds of restructuring, and we cannot get excited about the prospects for a combined entity breaking this pattern,” said analyst Michael Bruynesteyn of Prudential Equity Group, Inc., in a research report.

While Dana has maximized shareholder value in the last five years, ArvinMeritor has struggled to manage its own assets, said Lehman Brothers analyst Darren Kimball. ArvinMeritor was formed in 2000 after the merger of Arvin Industries, Inc., and Meritor Automotive.

The important question is not which company is run better but which has the better products and future, said Chester Devenow, who led the growth of another Fortune 500 Toledo parts supplier, the former Sheller-Globe Corp. His company was acquired in a leveraged buyout in 1986.

“By a mile, Dana has,” said Mr. Devenow, adding that he is surprised Dana wasn't a target sooner. “They were a sitting duck.”

He said, “Don't worry about Arvin. There are plenty of other players out there. Worry about Toledo.”

Dana was criticized after the $3.9 billion buyout of replacement-parts maker Echlin, Inc., its largest of about 50 acquisition and joint-venture deals made in the 1990s. Consolidation of the operations was hampered by the deal's structure, and weak market conditions made the cost and long-term strategic gains harder to justify.

The firm's stock has never regained the $61.50 a share price it enjoyed on the New York Stock Exchange shortly before the Echlin deal was announced, one analyst noted. Nearly five years later, Dana stock languished at a low of $6.15 a share; on Friday, it closed at $15.96 a share.

Echlin was too much of a hodgepodge of acquired companies that needed deep restructuring, and Dana didn't have the time to adequately study the firm SPX Corp. had targeted for a $3 billion takeover, said analyst Joseph Phillippi, president of AutoTrends Consulting in Short Hills, N.J.

If Dana had done deeper due diligence, management led by now-retired CEO Southwood “Woody” Morcott may have backed away from Echlin, Mr. Phillippi said.

“I think what they didn't know ... was the extent to which the company, meaning Echlin, had to be restructured,” he said.

But Mr. Morcott told The Blade yesterday that he has no regrets about the Echlin purchase. The Dana leader who left the company more than three years ago said, “I think it has worked out fine for Dana.”

Also hurting Dana's performance is its loss of key vehicle contracts to rivals, including frames for General Motors Corp.'s full-size pickups and sport utility vehicles, as well as axles for DaimlerChrysler AG's Dodge Ram.

To tackle its financial picture, Dana started in 2001 a widespread restructuring effort that analysts typically hail. It included cutting its dividend to a penny a share from 31 cents and plans to sell its profitable Dana Commercial Credit subsidiary, eliminate 15 percent of its 74,700 jobs, and close or consolidate more than 30 facilities. Some of DCC remains because an adequate buyer couldn't be found, but Dana said this year it will cut even more jobs, now about 20 percent of its total, and add nine sites to shut or consolidate.

ArvinMeritor, meanwhile, was condemned early on for the $7.5 billion merger that formed it. Analysts questioned whether there were enough cost savings to validate the deal, but some have since changed their tune.

Since its inception, ArvinMeritor has trimmed about 4,500 of the 36,500 jobs it had, shed factories, cut life insurance benefits for some U.S. retirees and workers, and reduced health-care benefits for about 10,000 current and future retirees. It also in the process of slashing its supplier base.