Deal-Making Revs Up in the Car Business
Consider the state of the world’s auto industry: a glut of 20 million vehicles; 75% of auto makers are losing money; consumers demand more but want to pay less; regulators are mandating new, cleaner engines; and suppliers are being squeezed to lower costs.
It all adds up to a caldron of forces feeding a mergers and acquisitions frenzy of historic proportions. The breakneck speed of change was evident Thursday as two major deals totaling nearly $15 billion in value were announced.
In the first deal, Ford Motor Co. agreed to acquire the passenger-car operations of Volvo of Sweden for $6.45 billion. Ford, the world’s No. 2 auto maker, grabbed Volvo to fill a gap in its premium European product line while boosting its market share there.
Volvo decided to bail out of the car business because it was becoming a mere niche player strapped with higher costs than larger rivals. Top officials said it also lacked the resources alone to develop the alternative-fuel engines and new retail concepts that will be needed in the next century.
The second deal marks the largest merger ever in the auto-parts business. Cleveland-based auto parts and aerospace company TRW Inc. said it is buying LucasVarity, a British-based brake maker, for $7 billion. The deal, if completed, would make TRW the world’s third-largest parts supplier.
TRW’s bid is an effort to obtain technology to develop complete front-end systems for vehicles. These complex modules, including brakes, steering and suspension systems, can be more easily installed at lower cost.
These two acquisitions come in the wake of last year’s blockbuster merger of Daimler-Benz of Germany and Chrysler Corp. of the U.S.
Such deals are a response to a global vehicle overcapacity that is forcing auto makers and suppliers to seek out strategic partners to cut research and product development costs while increasing their global marketing reach.
“Companies will have to rethink their ability to survive alone,” said Robert Eaton, co-chairman of DaimlerChrysler.
They are. Just recently, General Motors Corp. increased its stakes in both Isuzu Motors and Suzuki Motor of Japan. Hyundai Motor acquired its bankrupt South Korean rival Kia. Toyota Motor Corp. took control of fellow Japanese makers Daihatsu Motor and Hino Motors. Debt-laden Nissan Motor Co. has put itself up for bid. Honda Motor Co. of Japan and BMW and most mid-size European auto makers are subjects of merger rumors.
“Everybody has been talking to everybody in the industry for at least the past year,” said Ford Chairman William Clay Ford Jr.
Ford Motor sized up Volvo for a while, but talks intensified in the last month. Volvo also was wooed recently by Fiat of Italy and last summer by Volkswagen of Germany. But Ford, with operating earnings of $6.6 billion in 1998 and cash reserves of $24 billion, was seen by Volvo as the partner of choice.
If the deal is completed, Ford would take control of Volvo’s car operations, including three assembly plants and two engine plants in Europe as well as its research and development center in Goteborg, Sweden. Volvo would retain its commercial truck, bus, construction equipment and aerospace operations.
Both companies would retain rights to the Volvo brand name. Ford could use it for passenger cars, minivans, sport-utility vehicles and pickup trucks. Volvo would retain the corporate brand for commercial vehicles and nonautomotive products.
The deal would benefit both companies, analysts said. Ford would get a line of premium vehicles that do not compete directly with its high-line Lincoln and Jaguar brands, Volvo capital for its commercial business.
“This is a good fit,” said Jim Hall, analyst with AutoPacific Inc. “There is virtually no overlap.”
Ford, which produced 6.8 million vehicles last year, said it hopes the acquisition will help it substantially increase sales of luxury cars. It now sells 200,000 Jaguars, Lincolns and Aston Martins a year and, with Volvo, hopes to reach sales of 1 million in a decade.
The deal’s biggest effect will be in Europe, where Ford hopes to expand its 10% market share with a broader line of near-luxury Volvo sedans and station wagons. Ford should lower Volvo’s purchasing costs substantially while gaining some of the Swedish manufacturer’s highly touted safety expertise.
Volvo, which makes just 400,000 cars annually, is a prized brand name with an image of safety, durability and environmental sensitivity. Volvo attracts more female and younger buyers than either Lincoln or Jaguar.
While some analysts consider the price to be high, William Ford defended it as “fair” and noted it would immediately increase earnings and provide growth potential through new products. Analysts said Ford Motor is likely to add an SUV or minivan to Volvo’s lineup.
“The price is high but acceptable, particularly if they can get long-term savings and product growth,” said David Healy, analyst with Burnham Securities.
Leif Johansson, president of Volvo, said the company is divesting its car operations because it would have found it difficult to develop low-emission engines and invest in new dealerships.
“It is difficult to spread the cost of alternative power plants and other technology over a few hundred thousand vehicles,” said Michael Robinet, analyst for CSM Forecasting.
Ford has a history of patiently nurturing acquisitions. For instance, it took over Jaguar a decade ago and patiently invested billions to turn around the British marque without diluting its brand heritage.
“One of the things that won’t change is the Swedishness of Volvo cars,” said Jac Nasser, Ford president and chief executive.
In trading Thursday, Ford shares rose $2.19 to close at $62.50 on the New York Stock Exchange. Volvo’s American depositary receipts lost 81 cents to close at $26.56 on Nasdaq.
The deal is subject to approval by regulators and stockholders. While most analysts believe the buyout will be approved this spring, Volvo has backed out of merger agreements before. Shareholders blocked a proposed merger of equals with Renault of France in 1993 because of nationalistic concerns that Volvo would have little control and jobs would be moved out of Sweden.
There are also questions whether TRW’s all-cash offer for LucasVarity will be completed. Rival auto supplier Federal-Mogul Corp. said Thursday that it might raise its earlier $6.5-billion cash-and-stock offer for LucasVarity.
Whatever the outcome, analysts expect mega-mergers to continue in the parts business as auto makers demand that suppliers lower costs while taking on more design and engineering responsibility.
TRW shares lost 88 cents to close at $50.25, and LucasVarity’s American depositary receipts gained $1.25 to close at $47.94, both on the NYSE.
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Car-Pooling
Engineering prowess and a reputation for safety and environmental responsibility are qualities that Volvo would bring to Fords global stable. Key models such as the 1999 S80hailed by automotive critics as a stylish, ultra-safe, well-performing sedanhave helped revive the Swedish auto makers U.S. sales in the last few years. Annual Volvo sales in the U.S., in thousands:
1998: 101,171
* Source: Automotive News
