Lack of finance package called unusual

7/17/2003

A bold move by a smaller Michigan auto parts company to launch a hostile takeover of Toledo's largest corporation, Dana Corp., has surprised experts that the would-be acquirer, ArvinMeritor Inc., has no financing arranged.

The Troy, Mich., firm said it expects the takeover to cost it about $2.2 billion to purchase the firm, plus $200 million in expenses. And it would need to refinance about $2.2 billion in Dana's debt. It said it expects financing not to be a problem and that it will use banks and credit lines to raise the cash to pay Dana shareholders $15 a share to acquire control of northwest Ohio auto parts giant.

“By its very nature, it's [the takeover attempt] hostile to management, so you don't want to give any reason for the management to reject it in a valid fashion that will hold up in court,” said M.P. Narayanan, a professor of finance in the college of business at the University of Michigan in Ann Arbor.

“If you don't have the financing lined up, that kind of gives a lot of negotiating power to the other side. And it gives time for the target company to go ahead and find a white knight.”

Jessica Ong, of Thomson Financial in New Jersey, said the nebulous nature of the financing package might stem from the uncertainty inherent in a hostile takeover bid. Twenty-eight such takeovers have been launched this year and eight have been withdrawn, she said. In 2001, 30 hostile bids were started and more than half fell through, she added.

Martin Sikora, editor of Mergers & Acquisitions: The Dealmaker's Journal, a monthly magazine based in Philadelphia, said it's quite possible that the financing is not completed because ArvinMeritor moved quickly to broker a deal after Dana leaders rejected an offer made in private.

“My sense is that [the financing deal] is pretty close,” he said. “It's not just a fly-by-night company. It's a solid, established company with banking relationships, so if they had the luxury of time, they would have gotten all the i's dotted and the t's crossed.”

ArvinMeritor, which has $6.9 billion in annual revenues, announced its unsolicited takeover July 8, about a month after Dana's chief executive initially rejected the proposal and about three weeks after Dana's board spurned it. The Toledo Fortune 500 firm, with $10.3 billion in annual revenue, is now weighing the public tender offer and is to respond by July 23. Experts expect Dana to again reject the offer and advise shareholders not to sell their stock.

ArvinMeritor said it expected to buy the Dana stock with cash, raised from whatever borrowing it does. As of its last fiscal quarter, the Michigan firm had $121 million in cash.

The lack of specific information about financing in ArvinMeritor's federal regulatory filings prompted Ohio's securities regulators to seek more information last weekend.

If a company has a significant presence in Ohio, documents from any takeover attempt must be filed with the state's division of securities and reviewed by attorneys like Tom Geyer, assistant director of the Ohio Department of Commerce.

“Financing is one of the main things we look at,” he said. “We can't judge the fairness or the merits or give an opinion ... but we wanted to make sure there was sufficient disclosure so shareholders fully understood the contingent nature of the financing arrangement.”

After weekend negotiations between the state's attorneys and those from the company, ArvinMeritor issued a supplemental disclosure that said little more than the initial filing with the U.S. Securities and Exchange Commission.

In its amended statement, the company said: “ArvinMeritor hereby confirms, that the company has not yet entered into any agreements, commitment, credit facilities, letters of credit or other financing agreements with respect to the new financings.”

Doug Austin, president of Austin Financial Services Inc. in Toledo, who has written a book and 40 articles on tender offers, said, “If you don't have it lined up and then you're not able to perform, from a public relations standpoint, you look really stupid.”