When Acquisitions Go Bad--Deals turn sour for Federal-Mogul, Breed, Siemens

Federal-Mogul Corp. dumps three top executives following a disappointing third-quarter. Breed Technologies Inc.

implores a bankruptcy judge for help with a survival plan. Siemens Automotive dissolves its joint venture with Breed and considers finding a new safety restraints partner. Siemens acquired a 13% share of Breed in 1997 by purchasing $115 million of Breed stock, and as of mid-October the stock was practically worthless. A trip to Detroit's new casino would have been smarter.

Three examples do not a trend make. But if ever there was a time to question the prudence of mergermania, now would be it. Ask an industry observer to name two aggressive companies on the merger and acquisition (M&A) front, and Breed and Federal-Mogul would make the list. Combined, they have hatched more than 20 deals.

Many of these acquisitions have been successful. But Breed and Federal-Mogul suffered indigestion when they each gobbled up the gastronomical equivalent of a side of beef. The bigger the acquisition, the harder it is to integrate.

For Breed, it was AlliedSignal's restraint systems business, overvalued at $710 million; for Federal-Mogul, it was Cooper Automotive, an acquisition that, again, was overpriced at $1.9 billion.

Cooper was not Federal-Mogul's biggest purchase. That distinction goes to T&N plc, which sold for $3 billion. But the difference with T&N is that the piston and seal supplier fit directly with Federal-Mogul's core strategy.

Cooper didn't entirely fit with Federal-Mogul. It had an aftermarket presence with non-core products such as wiper blades and lighting. With aftermarket sales stumbling, Federal-Mogul will now sell some of those operations.

Breed has been treading an ocean of debt since its AlliedSignal acquisition. Its $1.6 billion in debt exceeds Breed's 1998 sales of $1.3 billion. The heavy debt smothered the fact that Breed and Siemens had plenty of new contracts, but many of the jobs wouldn't pay dividends for a few years.

And it didn't help that Breed was offering bargain basement prices to customers. Sources say Breed, eager to source full safety systems, often bid jobs substantially below the competition, offering profits that would have been negligible, at best.

Siemens is a different story. It rode Breed's coattails to economic distress. The electronics

giant needed Breed's air bag and seat belt production if it wanted to supply full safety systems.

Still, Siemens tried to put a positive spin on Breed's troubles. Last December, Wolfgang Schaefer, the Siemens executive who served as CEO for the venture, told WAW, "By this time next year, Breed's problems will be history."

Now, Siemens wants nothing to do with Breed. The companies agreed to dissolve their venture in mid-October because, despite full order books, Breed could no longer meet its financial obligations. Both companies say they will meet the terms of those contracts, but how Breed will do so remains in question.

Johnnie Cordell Breed, chairman and CEO, still hopes to emerge from bankruptcy debt-free. Meanwhile, Breed's lenders eye sale of part of the company. Siemens is not among the bidders.

Siemens still wants into the safety systems business, so it is looking for a new partner that produces air bags, seat belts, pretensioners and inflators to link up with Siemens' sensors and air bag control units.

For now, Siemens is just another Breed stockholder facing the realities of a bad investent.

Will such episodes spawn a more conservative view of mergers and acquisitions? David Andrea, chief economist at CSM Forecasting, cautions that a few failures are not representative of the industry at large. Still, a shrinking Tier 1 market should push acquisitions to the lower tiers.

"Maybe now the Tier 1s start identifying smaller companies for components that they need to fill in their portfolios or some specific technology," he says. "Maybe more of the activity will be toward the second and third tiers."