Special Coverage

logoSAE World Congress

DETROIT – Investments from private-equity firms are the only way to bring financial stability to the struggling U.S. auto industry, Metaldyne Corp. Chairman and CEO Tim Leuliette says following a panel discussion at the SAE International World Congress here.

“Private equity is sitting on $200 billion of free cash right now, and there are few industries on Earth that can actually use that kind of money,” Leuliette tells Ward’s. “So the dot-com revolution is over, and the consolidation of other industries is over. It’s time – the auto industry is ripe.”

In recent months, funds from private-equity firms have poured into the auto industry as investors seek opportunities and bargains among distressed parts manufacturers and auto makers.

A number of private-equity funds, including Blackstone Group and Cerberus Capital Management, are in talks to acquire DaimlerChrysler AG’s Chrysler Group. Cerberus and equity fund Appaloosa Management also are in the bidding for bankrupt supplier Delphi Corp., although media reports suggest Cerberus is getting cold feet.

Billionaire Wilbur Ross’ International Automotive Components has acquired Collins & Aikman Corp.’s European operations and Lear Corp.’s European interior plastics division, as well as Lear’s North American interior trim business. Investor Carl Icahn wants the rest of Lear (seating and electronics) in a transaction valued at about $5.3 billion.

ArvinMeritor Inc. is selling its exhaust business to New York-based One Equity Partners for about $310 million. Crestview Partners L.P. is leading the acquisition of the privately held Key Safety Systems Inc. (formerly Breed Technologies).

Leuliette is the poster child for private-equity investing in the auto industry. He was part of Heartland Industrial Partners LP, a private equity firm that acquired Simpson Industries Inc., MascoTech Inc. and Global Metal Technologies Inc. to form Metaldyne in 2001.

Last year, Metaldyne got a cash infusion of $200 million from Asahi Tec Corp. when the Japanese supplier acquired Metaldyne.

During the panel discussion here, Leuliette and other industry executives were asked how private-equity investments will affect supplier-OEM relationships.

“As long as the public market undervalues these (automotive) companies, private money, as it always has, will come in and be a catalyst for change,” Leuliette says.

However, the panelists agree private-equity companies “cannot all be painted with the same brush,” as some have short-term investment strategies and little patience for a return.

Bo Andersson, General Motors Corp.’s vice president-Global Purchasing and Supply Chain, views private-equity companies positively “because they bring money…and because they have higher expectations on the managers than traditional companies.”

But he also sees a downside.

“I view it negatively because, to them, one week is long-term,” Andersson says. “For us, 10 years is long-term.”

Laurie Harbour-Felax, president of Harbour-Felax Group consulting, says she has worked with a number of private-equity funds considering supplier acquisitions, and that some gloss over the necessary due-diligence.

Some of the investment companies understand what it takes to create a successful auto supplier, while many do not, she says.

One of her clients “didn’t even consider looking at an operation before they purchased the company,” she says. “They’re not getting their arms around the total cost-performance picture” of the company they are considering acquiring.

“We have suppliers who make a ton of money at high margins in products that are 2% of their business and others that lose a lot of money on products that are 50% to 60% of their business,” Harbour-Felax says. “That total cost performance is important.”

Many working in the auto industry fear private-equity companies merely will eliminate jobs and close facilities as they restructure operations on their way to making a quick buck.

“We’re going to find some private-equity firms that will not be welcome in Detroit after their stint,” Leuliette says. “Others will become true partners.

“Private equity is not going to spend tens of billions of dollars (in the auto industry) if it believes it will be going down the drain hole,” Leuliette says. “It’s putting it into the auto industry because it sees opportunity. And there is opportunity, because it’s still a growth industry.”