Invasion of Privacy

As a former newspaper reporter, I heard a lot about privatization. Most of the school districts or local governments I covered had at some point debated the merits of handing off custodial or other work to private companies under the assumption that it would save tax dollars.

The private sector is supposed to be more efficient than the public sector because of competition - a governmental body becomes slothful because it has none; a business stays trim and agile because it can be replaced.

I didn't expect to hear much about privatization as an auto writer, but the topic has resurfaced, in a different context. The question today is whether it's better for automotive suppliers to be publicly traded or privately held.

It's easy to paint the big publicly traded Tier 1 suppliers as fat and filthy rich while the smallest, privately owned suppliers struggle, but that's not the reality in today's technology-based economy. The small private company has an advantage because it is not subject to intense shareholder pressure.

"Going private" - by buying all outstanding stock - is becoming popular in supplier board meetings because Wall Street is not rewarding Old Economy automotive stocks.

Price/earnings ratios are so low that supplier executives have to consider leveraged buyouts of their own companies.

Look at the stagnant stock prices of newly public companies such as Delphi Automotive Systems and Meritor Automotive, and it's easy to imagine such talks. These companies are doing all the right things - making money, winning new business, developing innovative products - but their stocks remain undervalued.

Going private also can be a way out for a troubled company. It can tackle the balance sheet, reduce debt and restructure - all out of the public eye. "Then they can go public again under a better cost structure," says David Andrea, chief economist of CSM Forecasting.

Enter Tim Leuliette, who recently left as vice chairman of Detroit Diesel Corp. to become a founding partner and chief executive of Heartland Industrial Group of Bloomfield Hills, MI, a private equity firm focused in part on shoring up undervalued industrial companies by buying them and taking them private.

Small companies, he notes, had been the prey of conglomerates in the 1980s and early '90s. "Today, the predator is dead. The shareholder revolution of the '90s split up the conglomerates; they don't exist now," Mr. Leuliette says. "Where is the value arbitrage going to be played out? By private equity. Private equity allows for these companies to be pooled, built and harnessed in a manor viable for public markets."

Along with partner David Stockman - former U.S. Treasury Secretary in the Reagan administration - Mr. Leuliette is attempting to raise $2 billion of investment capital to drive the strategy. "Heartland is unique in spending the kind of money in the industrial world like we are," he says.

The trend toward private ownership is widespread. Durakon Industries Inc., a Lapeer, MI, producer of pickup truck bedliners, went private last year after a partnership formed by Littlejohn & Co. LLC acquired all of its common stock.

Wheel producer Hayes Lemmerz International Inc. wrestled with the idea earlier this year after majority shareholders (owning 75% of common stock) presented a proposal to take the company private. The plan died in April because the board couldn't agree on a price per share to be paid to minority shareholders.

Sources say Lear Corp. considered going private earlier this year when the stock price was in the low $20 range. Chairman Kenneth Way, who hands off chief executive duties to President Robert Rossiter as of Oct. 1, tells WAW that "we always look at alternatives," but no such proposal is on the table currently.

Mr. Leuliette considers Lear "a poster child for what private equity can do." It was public and went private in 1988 with $50 million in equity and $450 million in debt in 1988. "That $50 million is worth $2 billion today, even with the stock market the way it is," he says.

Going private also was an option for settling a protracted proxy battle at Simpson Industries Inc., whose stock has been weak.

And consider New Venture Gear, the drivetrain joint venture between General Motors Corp. and DaimlerChrysler Corp. An initial public offering has been discussed for NVG for years. Why hasn't it happened? Because Wall Street would shrug.

The discussions are not limited to suppliers. Some industry observers suggest that General Motors Corp., the world's largest automaker, ostensibly could go private if it sells Hughes Electronics. It could fetch upwards of $50 billion, which would be enough to buy back all of its stock. It's foolish to some, but it's possible.

The granddaddy of private suppliers is Germany's Robert Bosch GmbH. It has only two stockholders: the Bosch Foundation, which owns 91% of the company's capital stock, and the Bosch family, which owns the remaining 9%. The foundation is a charitable endeavor and takes no operative role in running the company. That function rests with a powerful 11-member board of management.

Bosch illustrates the benefits of private ownership. It led the way in introducing breakthrough automotive technologies: antilock brakes, electronic stability program, common-rail fuel injection. It took eight years or more of development time before each of these products was ready for market. Still, Bosch stayed with the costly ventures because the company believed in the technologies. In a public company, most shareholders couldn't wait eight years for dividends.

"Being a private company, if management has the will and the money, you can handle this, and you don't have to defend yourself to a group of analysts," says Robert Oswald, chairman, president and chief executive of Robert Bosch Corp.

But even at a private company like Bosch, there is earnings pressure. "Our management board insists that we earn a return," Mr. Oswald says. "And I'd say if we didn't fund the foundation for a couple years running, we'd have a rather severe amount of pressure."

He expects to see more suppliers wrestle with the question of going private. "But it's not free to take a company private," he says. "Someone has to come up with the money."

Mr. Leuliette is glad to oblige.

Bosch, Siemens Await Mannesmann Approval German competitors Robert Bosch GmbH and Siemens AG await government approvals of their joint bid to acquire Atecs Mannesmann AG, the automotive systems division originally slated for spin-off from Germany's Mannesmann AG. The $8.1 billion (9.1 billion euro) bid came five days after Thyssen Krupp AG of Germany offered $7.8 billion (8.7 billion euro). Mannesmann's supervisory board approved the sale. Bosch and Siemens vow to retain Atecs Mannesmann's operating independence for at least three years. Despite the pooling of resources, Bosch and Siemens are not merging. Siemens intends to combine its automotive operations with Mannesmann VDO, and Bosch will merge its automation technology activities into Mannesmann's Rexroth division.

Lear Wins Electrical Architecture Contract Lear Corp. wins a contract with Ford Motor Co. to develop the electronic and electrical architecture for a future Ford vehicle. The technology hails from Lear facilities in Cologne, Germany, and will be produced at Lear plants in Europe, Asia and North America. The architecture integrates power and signal technology, which simplifies assembly and wiring and reduces weight, Lear says. Included is Lear's "smart junction box," which requires fewer interconnections. The architecture would mesh well with 42-volt systems that are expected to become standard in the future.

Meridian to Acquire Cambridge Industries Ailing plastics supplier Cambridge Industries Inc. of Madison Heights, MI, agrees to be acquired by Meridian Automotive Systems Inc. for $363.1 million. Under the agreement, Cambridge files for Chapter 11 bankruptcy protection. It is the second major metro Detroit plastics supplier to file for bankruptcy recently, following Novi, MI-based Key Plastics LLC. Cambridge's woes stem from costly acquisitions.