When Richard Snell became the new chief executive of Federal-Mogul Corp. in November 1996, he arrived with a bitter pill for the company to swallow.

In the end, the medicine he prescribed would not only save the automotive supplier from a painful and uncertain future, but would more than double the company's size in little more than a year and send its stock soaring.

At the time, Federal-Mogul's board of directors believed in the company's strategy of expanding its retail aftermarket auto parts operations in developing nations. The board hired Mr. Snell, who had helped expand Tenneco Automotive, to better execute the strategy.

But Mr. Snell disagreed, and he didn't mince words. "I said, 'The strategy was bad. It's flawed and it could never work and here's why. And if you don't agree with that, then let's disagree now and you can go find somebody else,'" he recalls. "They said, 'No, no, you know the business, we don't.'"

Mr. Snell didn't have to look beyond the company's balance sheet for proof that the retail strategy was failing. The company had lost money two years in a row, and its stock was languishing.

The board backed Mr. Snell's plan, which was to sell many of the aftermarket operations and return to Federal-Mogul's manufacturing roots.

"We had disappointed the investment community quarter after quarter after quarter where the management had no credibility anymore, and people were just throwing up their hands," he says.

Under Mr. Snell's leadership, Federal-Mogul spent 1997 in a major restructuring. The company began selling 132 retail operations around the world. Another 30 wholesale aftermarket operations overseas would be sold or restructured.

Federal-Mogul eliminated 250 positions by closing its plant in Leiters Ford, IN, and transferring operations to a new facility in Juarez, Mexico. Sixty positions were eliminated when customer support functions in Arizona were consolidated at the company headquarters in Southfield, MI. Two central distribution warehouses were closed in Kentucky, eliminating a net 45 jobs. Employees in Jacksonville, AL, swallowed a wage cut. More jobs were eliminated when the European aftermarket management was consolidated with the Wiesbaden, Germany, manufacturing headquarters.

In all, about 400 people lost their jobs in the restructuring. "Nobody enjoys doing this," Mr. Snell told shareholders at the company's annual meeting last April. "But for the good of the whole, we've got to do it. We cannot carry extra people and be a winner in today's competitive environment."

With the restructuring well under way, Federal-Mogul set out to join the systems business through acquisitions.

The company already made high-quality gaskets and seals, but it didn't make enough to market a full engine or transmission-sealing package to OEMs. The company also made engine bearings, but it wanted the ability to market the bearings as a system complete with piston, piston rings, connecting rods, cylinder liners and wrist pins.

In October, Federal-Mogul announced plans to buy Britain's T&N plc, a $3 billion supplier of engine and transmission products and Europe's leading gasket supplier (see p.129).

With the T&N deal still facing regulatory hurdles, Federal-Mogul moved ahead with the acquisition of privately held Fel-Pro Inc. of Skokie, IL, for $720 million.

Fel-Pro's specialty is gaskets for the North American aftermarket and OE heavy-duty truck market. Thecompany, with 1997 sales of about $500 million, had been seeking a buyer to pursue international markets.

As the three companies come together, Mr. Snell says the only overlapping area is in engine bearings. The company has said some thin-wall bearing operations will be sold off to satisfy anti-trust requirements.

The sealing system market will be competitive, as Freudenberg-NOK General Partnership and Dana Corp. are among the suppliers already doing it.

Freudenberg-NOK is the lead supplier for a full sealing package on the new Chrysler 2.7L V-6, which appears on the LH-replacement models. Dana supplies most of the seals for the 1.6L engine being made in Brazil in a joint venture between BMW and Chrysler.

With its two acquisitions, Federal-Mogul has a global sealing business of $1 billion, with about a third each coming from T&N, Fel-Pro and Federal-Mogul.

When the dust settles on the two deals, Federal-Mogul will have ballooned from a $2 billion underachiever with a questionable commitment to OEM business to a $5.5 billion giant with a bright future.

But if Mr. Snell sticks to his word, there won't be much dust settling around Federal-Mogul. He says negotiations are ongoing with more than a dozen acquisition candidates, and that perhaps two or three more deals could be completed by year-end.

"It has to meet our strategic goals and clear our financial hurdles, and we'll do it," he says. "And we'll keep doing it until the financial community says, 'No mas.'"

The key to the company's turnaround, he says, was setting aggressive goals and striving to meet them.

Among the goals: to make $185 million cash, with $100 million from operations and $85 million from the sale of the aftermarket operations, and to work toward a 10% return on sales across the business.

"Frankly, we delivered ahead of all of those goals, and it started to create a confidence level in the investment community," he says. Since his arrival, the company's stock has doubled in value to about $40 per share.

Dick Snell was not having a happy birthday Sept. 3, 1997. The chairman, president and CEO of Federal-Mogul Corp. had just learned that the board of British piston ring maker T&N plc had rejected his offer to merge the two companies.

Federal-Mogul's stock had risen significantly since the two companies started talking, and the deal no longer made as much sense for T&N plc shareholders.

He turned to his chief financial officer Tom Ryan, an ally from his days at Tenneco, and asked him what it would take to buy the supplier instead.

"I said, 'We have to buy them. Can we borrow $3 billion?' He didn't even smile. He just said, 'I don't know.' And within 24 hours, he had $3 billion bulletproof, waterproof, locked. And the reason is it's a good deal," says Mr. Snell.

And sometime this quarter the deal is expected to clear regulatory hurdles in Europe and the U.S. and help Federal-Mogul hit the halfway point in its race to hit $10 billion in sales by 2002.

Mr. Snell says 1997 was a good year, but it was just a tuneup for better times.

"We had to clear the deck, we got rid of the under-performers, we changed our strategy. We started making the machine we had work well," he says.

The key to that new strategy is T&N.

"T&N, every way we looked at it, was the best fit for us. It fit like a glove," says Mr. Snell.

The U.K. supplier is the No.1 piston ring company in the world and number two in pistons. The company also has gaskets that go with Federal-Mogul's oil seal business.

"The problem was they are bigger than us by quite a bit, a billion, and so we had to work through that," Mr. Snell says.

Initially there was concern about a bidding war, maybe a challenge from rival engine systems supplier Dana Corp., which also would fit well with T&N's units. In fact, when the deal first surfaced, many in England speculated that Federal-Mogul eventually would lose out to someone with deeper pockets.

But no one came forward, and enough shareholders have signed on now that the deal is all but sealed.

"Amazingly, the only overlapping area was engine bearings between T&N and Federal-Mogul. And we knew we would have to sell off that business," says Mr. Snell.

The folks at T&N seem equally upbeat about the new arrangement.

During a fall tour of the U.K. company's technical center it was clear they expected the new company to be a solid match. T&N researchers are pushing ahead with research in new oil-filter technology, powdered metal, next-generation camshafts and other vital engine technologies.

>From its country-estate style R&D center near Rugby, England, T&N is leading the way in engine performance analysis both with sophisticated hardware and computer modeling, explains Alan Begg, managing director of the technical center.

T&N's equipment for measuring piston performance is so sophisticated it has started a side business selling the technology to competitors.

T&N already has begun consolidating its research staff in the U.S. at its new 76,000-sq.-ft. (7,100-sq.m) technical center in Plymouth, MI.

Piston ring subsidiary AE Goetze and bearings unit Glacier Vandervell both already have moved to the center, and sealing unit McCord Payen Inc. will move later this year.

And just as U.S. companies are re-examining their manufacturing processes, T&N is in the midst of a major overhaul and review of all systems and operations to improve its manufacturing efficiencies.

When the deal finally clears the regulatory hurdles in the U.S. and Europe, it's likely to shake up some aspects of the powertrain landscape.

Of particular interest will be the piston-ring business.

Currently, Federal-Mogul buys aftermarket piston rings from Dana's Sealed Power Div., and AE Goetze buys some piston rings from Hastings.

It would now be possible for AE Goetze to supply aftermarket piston rings for Federal-Mogul in place of Sealed Power, and that could give AE Goetze a leadership position in North America as well as Europe.

But Mr. Snell says it's not a given.

"We now have the capability of supplying ourselves (with AE Goetze), but we're not tooled for it. So it comes down to whether it's worth it or not," he says.

That means if Dana can meet price requirements, Federal-Mogul is not going to tool up just for bragging rights, even against Dana, a key rival in the engine seal business.

Peregrine Inc. has a new CEO, Jess Ball, the current COO, after the abrupt resignation in late January of Edward Gulda, who had been chairman and chief executive since the company was formed in 1996. Peregrine was launched to resurrect four failing Delphi Interior & Lighting plants. Contacted at home, Mr. Gulda declined to discuss his plans or why he left. He worked previously for Ford Motor Co. and ITT Automotive. He also worked for Rockwell Automotive before it was Meritor and for Varity Corp. and Kelsey-Hayes before they merged.

Pierburg Merges With Kolbenschmidt

Two of Germany's largest engine component suppliers have completed their merger, aimed at a greater global presence. Kolbenschmidt Pierburg AG has combined annual sales of $1.34 billion and employs 10,700 people. About 60% of sales comes from outside Germany. Combined, the company will produce engine blocks, cylinder heads, pistons, oil pumps, water pumps, throttle bodies, intake manifolds, fuel pumps and exhaust gas recirculation valves. The new venture's stock is traded publicly in Germany.

Around the Industry

Tower Automotive is expanding its plant in Bellevue, OH, to produce the sub-frame differential, axle and brake assemblies for a new luxury car in MY '99 . . . TRW Inc. claims to be the first supplier to manufacture air bags in South America. Production of 50,000 driver-side air bag modules for the Fiat Palio this year has begun in Sao Paulo, Brazil.