Supplier consolidation - or "merger-mania" as it is being referred to by some - is no walk in the park. In fact, some companies that enter into corporate wedlock find the stroll can be quite treacherous.
Stephen J. Girsky, a principal and automotive analyst at Morgan Stanley A Co., says his firm has tracked 75 supplier mergers and acquisitions worth $17 billion since February 1995. The current pace is running at two per week. The trend will continue into 1997 and beyond, he says, if it provides "added value" to the supply chains and automakers.
Consider the case of Foamex International Inc.'s 1994 acquisition of JPS Automotive Products Corp. (see WAW, June 1995) where well-intentioned strategy and precise execution weren't enough.
"Trying to supply customers as a Tier I using foam and fabric lamination made good sense, says Sam Bonanno, Foamex executive vice president. "Then we had very significant: chemical price increases in 1995 - actually four chemical price increases totaling about 25% over an 18-month period in a market where 3% is normal - and the board made a decision to sell JPS and Perfect Fit (household foam products) to reduce our long-term debt and focus on our core products." Perfect Fit went to PFI Acquisition Corp. and JPS to Collins & Aikman Corp.
"It didn't work out because of bad timing," Mr. Bonanno explains. "The environment had changed, and there was a need to adapt to the (new) environment."
This year' court case between Detroit Center Tool Inc. (DTC) and Classic Design Inc. is evidence of a joint agreement where the spouses threw not only pots and pans but the kitchen sink as well.
DCT and Classic Design agreed to work together on complex auto underbody welding systems. DCT would build the system, disassemble it and install it in the automaker's plant. Classic Design would provide process engineering and management as well as tooling designs. Eventually problems arose in customer plants, which DCT attributed to Classic's engineering and design work. Classic disagreed, and DCT was forced to make and pay for the necessary adjustments. A court ruled in favor of DCT to the tune of nearly $6 million, and the relationship ended.
In yet another situation, a medium-sized U.S. company, which was the sole source of a commodity to its biggest customer, was asked to provide support for an operation in Mexico. The supplier formed a joint venture with a Mexican company. Initially, the JV offered good quality, delivery performance and profitability. Then the U.S. partner wanted to expand the JV and use it as an export source. The Mexican company didn't have the capital to expand and problems ensued.
Because there was no predetermined exit process, the Mexican partner seeking a negotiating advantage, took over the JV facility using attack dogs and guards armed with machine guns. The U.S. partner eventually bought out the Mexican partner, but lack of planning cost both companies hundreds of thousands of dollars and pesos for extra legal and accounting fees - not to mention ammunition and dog food.
As more suppliers exchange vows, growing numbers of mergers, acquisitions and joint ventures fail to live up to their advanced strategic, financial and operational billing. Raw-material price hikes, unstable foreign markets, culture clashes and poor planning are only a few of the barriers to successful unions.
Experience shows that large suppliers such as General Motor Corp.'sAutomotive Systems, Corp., Johnson Controls Inc., Magna International and Corp. have more success acquiring companies than medium- and small-sized suppliers. One supplier analyst explains that smaller companies are more lean and therefore more sensitive to market hiccups that can derail a deal. Others suspect the reason big companies are more successful is that they have the resources to do the homework required to prevent disasters.
"A larger company approaches it with more discipline, does a thorough due diligence and properly negotiates the deal," says Richard M. Bolton, head of the corporate securities practice at the Detroit-based law firm Dickinson, Wright, Moon, Van Dusen & Freeman.
Due diligence is the process a buyer uses to examine all aspects of the business it's acquiring - administrative, operational, legal and accounting.
"If you carefully screen what you're doing, generally speaking, you can avoid these problems," says J.T. Battenberg III, president ofand Corp. executive vice president. "If you spend time up front defining the issues and strategy (these ventures) should be successful."
Phil Gilbert, managing principal of Plante & Moran LLP's corporate finance group, agrees with Mr. Battenberg on the preliminary work required to forge a successful acquisition or merger. "The clarity and correctness of the visions that support the strategy and the execution of the strategy are critical," says Mr. Gilbert. "You can have crummy vision and great execution or great vision and crummy execution and still be in the same boat."
Another medium-sized U.S. supplier hoped to capitalize on the systems trend, as well as grow its customer base, when it set up a joint venture in North America with a large foreign concern. Each partner produced different parts of the system. Over time the product synergy was realized but the relationships of both partners with their customers changed and the logic for the JV vanished.
Teaming up at home is one thing, but there are even more causes for quarrels when marrying an overseas company. One is that the foreign entity is only as strong as its home market. One medium-sized U.S. machining source formed a joint venture with a German technology partner of equal size. Again, the rationale for the deal was customer synergy. It was in place for a couple of years when the German partner's profits went south with the European market.
When it couldn't come up with more capital, the German partner was forced to withdraw, and the joint venture collapsed. Each partner lost at least $1 million, substantial for companies of their size. Heads may have rolled if they weren't privately held businesses.
Other roadblocks to international relationships include cultural and language barriers. Yet another is nationalism. In France, for instance, automakers such as Peugeot SA are afraid that foreign-owned suppliers will not see France as a priority, says Philippe Weill, chairman of Financiere Sogip Inc., which helps U.S. and European companies forge agreements.
Grounds for corporate divorce are even easier to find when the marriages are ill-conceived in the first place.
In 1994, rubber parts manufacturer Freudenberg-NOK formed the AUTOCOM joint venture with Monaco's Mecaplast to make composite plastic air intake manifolds. In October, Freudenberg-NOK sold its interest in AUTTOCOM to CMI International Inc.
"It didn't fit as well as we thought it would with our core businesses of complete sealing systems and brake and NVH (noise, vibration and harshness) packages," says a Freudenberg-NOK spokeswoman. "The manifold is a very difficult piece to make, and we were spending a lot of time fixing production problems."
Most companies would rather not discuss their marital mistakes. In the late '80s, MascoTech Stamping acquired several independent stampers and then sold them off, the latest to Tower Automotive. Could this be a sign that going the acquisition route was not an effective strategy for MascoTech? "I would not want to discuss the question of acquisitions that didn't work out," bluntly responds MascoTech President Lee Gardner through a spokesman.
"A few years ago companies did mergers and acquisitions for diversity; now people are sticking to core businesses," says Dickinson, Wright,s Mr. Bolton. It's very difficult to realize synergies. Each party may not fully appreciate the difficulties of the other side."
B.N. Bahadur, chairman of BBK Ltd., a Southfield, MI-based turnaround around fim, cites numerous reasons why corporate marriages collapse. "Sometimes the cash required to put two technologies together doesn't come together," says Mr. Bahadur. "Other times the cultures and management styles don't mix."
Information and data-processing problems also can take more time to resolve than originally anticipated, he notes. "And since they often don't have the same purchasing system, they don't purchase as a unit and they don't get the economies of the scale that they expected."
He also tells suppliers to be wary of marriages arranged by automakers who want to trim their supply bases. Craig M. Fitzgerald, principal at Plante & Moran and a WAW columnist, agrees. "These agreements can work when they're synergy based - product, process and customer service - and are culturally compatible," he states. "When they're OEM convenience-based, they'll stumble."
Corp. Purchasing Chief Thomas T. Stallkamp never has been a fan of supplier mergers and acquisitions. Motor Co. Purchasing Chief Carlos Mazzorin, who a year ago touted his match-making touch, also is changing his tune. "(Automakers) want the benefit of the collaboration." says Mr. Fitzgerald, "They're not that concerned with the structure of the collaboration."
Mr. Bolton stresses that the due-diligence investigation is the key to blissful marriages because it provides a mechanism for uncovering potential problems such as environmental claims, pension fund troubles, pending litigation, labor disputes, poor customer and/or supplier relationships and low-skill workforces.
Plante & Moran's Mr. Fitzgerald says he sees six important areas on which to focus for a winning deal:
* Confidentiality (especially in JVs and technology transfers).
* Cultural compatibility (operating styles, not necessarily social culture).
* Profitability (losses generate disagreements).
* Setting realistic goals (identifying and hitting attainable targets).
* Structure (tax, capital, unwind provisions, reporting hierarchy, geographic scope add technological scope all need to be defined).
"You need to get the two groups working together quickly and start realizing synergies," says Mr. Fitzgerald. "The longer it takes, the less likely it's going to be successful." It helps, he adds, if there is "a true warmth and genuine friendship and respect between the top people."
Mr. Weill advises that the deal be advantageous to both companies. "People on both sides have to be designated to make it work," he suggests.
Automakers may be backtracking a bit on their encouragement of supplier mergers, but it's clear they want the efficiencies that collaboration offers.
"The only way to accomplish the scale of efficiencies that the OEMs want is to do it through partnerships of some kind," says Plante & Moran's Mr. Gilbert. "Whether they,re working or not, they'll continue to happen.
"When you look at the capital cost of growing through acquisition, it's a huge hurdle for a smaller company," says Mr. Gilbert. "That's where the creative alternatives come into play. Technical and marketing exchange agreements are a cost-effective way to get critical mass with no additional debt and less risk."
Signs that a merger may be on the rocks:Heading for the Lifeboats
* Top new officers leave. Many officers brought in from an acquired company will try to suck it up and give it their best. But those who don't really have their heart in it often will conclude within a year that the new structure is not for them.
* Even worse, old top officers leave. When the people with a company before the change suddenly head for the lifeboats, something is wrong. Very possibly, people are not seeing the fruits of the newly configured organization as quickly as they had hoped, and are losing confidence that they ever will.
* Customers are concerned. If customers are worried about how the relationship is going, there's a problem.
* The two-companies-turned-one continue to act like two.
* Integration of systems seems to take forever. If communications, accounting or other systems need to be adapted to one another, as specific time frame should be understood.