Hostility Reigns

Combining ArvinMeritor Inc. and Dana Corp. is a bad idea because the new company would be the highest-leveraged supplier in the sector, there would be no benefit for Dana shareholders and U.S. antitrust regulators surely would object, Dana CEO Joe Magliochetti tells Ward's.

Magliochetti had been quiet since ArvinMeritor announced its $2.2 billion bid for the larger, Toledo, OH-based Dana. But he broke his silence last month in Traverse City, MI, at the Management Briefing Seminars, speaking to a crowd of about 1,500 people and then fielding questions from journalists.

He subtly referred to ArvinMeritor in his speech — and drew hearty laughter from the audience — by referring to a Merrill Lynch study that identified ArvinMeritor's strategic direction as “seeking size.”

As far as he's concerned, Magliochetti considers the ArvinMeritor offer dead. He says Dana's board of directors is not interested.

“We look at it and say, ‘Golly, there's not a lot of strategic logic, not a lot of financial benefit as a result of this,’” Magliochetti says. “Furthermore, if you look at the number offered, it's significantly below the value that we think is appropriate. Our board has determined we can create greater value just staying on our current course and delivering the results that are in our plan today.”

The tide currently seems to favor Dana. ArvinMeritor likely would have to raise its offer of $15 per share. Dana stock has hovered slightly above $15 since the offer was made July 9, so there's little reason for shareholders to accept the offer.

ArvinMeritor says it's willing to make a more attractive offer, but only if management from both companies can meet to discuss the deal — and if ArvinMeritor can find more value in the company.

If the deal could not be consummated by Aug. 28, the deadline would be extended, ArvinMeritor says.

As for the question about funding the deal, ArvinMeritor remains “comfortable with our ability to finance this transaction,” a spokeswoman says, adding that the supplier is holding back on an announcement to minimize interest payments.

Magliochetti says Dana will be stronger if it remains independent, and that the company already has made huge strides through a restructuring program announced in October 2001.

Headcount has been slashed 24%, from 79,000 to 60,000, and dozens of non-core assets have been sold in a bid to streamline. The restructuring will be complete by the end of this year, when headcount should stand around 56,000, Magliochetti says.

Combined, he says ArvinMeritor and Dana would hold virtually 100% of the heavy-truck axle business in North America, which raises the antitrust question.

The five commercial-vehicle producers in the U.S. “are totally against” the proposed takeover, the Dana chief says. ArvinMeritor produces heavy-truck axles and brakes, while Dana supplies axles, brakes and driveshafts for commercial vehicles.

In light vehicles, Magliochetti sees no potential integration. Dana supplies axles, driveshafts and frames; ArvinMeritor supplies wheels and roof and exhaust systems.

Magliochetti says he is under the impression ArvinMeritor has not consulted the U.S. Justice Dept. about a potential acquisition. “Often a company would approach the Justice Dept. or the Federal Trade Commission and say, ‘If we did this, we'd like an opinion.’ None of that has happened.”

ArvinMeritor sources say Justice officials have been consulted. ArvinMeritor has filed a lawsuit alleging Magliochetti shirked his fiduciary responsibilities by not quickly discussing the offer seriously with Dana's board.

“That's just not true,” he says, adding that he discussed the proposal with Dana's board the day after it was presented by ArvinMeritor CEO Larry Yost.

“I don't know if you can do it any faster than that,” he says. “We never made a decision without the full knowledge and discussion of the board.”

Meanwhile, ArvinMeritor's chief exhaust competitor, Tenneco Automotive, sees a potential upside to the takeover.

“Frankly, for us, management's attention would be off the ball,” says Mark Frissora, Tenneco chairman and CEO. “They wouldn't be talking about shocks and exhaust systems, so we like that. We'd probably improve our market share if it happened.”

Frissora says the integration of Dana and ArvinMeritor will be exceedingly difficult. “Both management teams dislike each other tremendously right now,” he says. “If it did happen, there would be tremendous discord. It would be very bloody.”

At presstime, the rhetoric had spilled into the courts, with a series of lawsuits between the companies.