Auto Focus: Viewing Joint Ventures as Merger Alternatives
MiBizWest • April 25, 2001
by Jim Gillette
After running full-tilt for much of the 1990s, mergers and acquisitions leading to consolidation in the automotive component supply industry are taking a breather. While some sectors may be approaching economically imposed limits of concentration, (tires, brakes, steering systems and pistons are some examples), there are other reasons M&A activity has slowed.
Cash flow multiples (the price of the deal) have progressively declined in line with the bear market for publicly-held companies. Many would-be sellers are trying to time the market and are waiting for the next boom in auto-related valuation. In addition, I documented in the March 28 issue of MiBizWest the significant tightening of credit needed to finance asset acquisition transactions.
Still a lot of M&A – Just a different form
In spite of this, there are still numerous deals being completed. The bulk of the transactions, however, has shifted from consolidation toward those that enable companies to refocus their assets into areas that better fit their core competencies and provide improved shareholder value.
Most of this activity is in the form of spin-offs or, in some cases, swapping of assets with other firms. Just a few recent examples include:
- Delphi Automotive’s announcement that it has five businesses.it is planning on divesting.
- Dana’s sale of its fluid systems opera- tion to the Maxair division of Standard Motor Products-and its Echlin unit’s Mr. Gasket to Performance Products Industries.
- Smiths Industries divestiture of the TI Group (which had itself acquired fuel systems maker Walbro just a few years ago).
- Delphi buying Eaton’s switch operations.
Joint ventures may be a better alternative
As an alternative to acquisition, the formation of joint ventures in the auto industry have seemingly accelerated. Suppliers needing to refocus their product, process and target markets may find JV s the best route. Joint venture advantages that include:
- Possibility of minimizing the requirement for capital investment. Given widespread excess capacity in many sectors of the auto industry, joint ventures can increase utilization of existing assets.
- Promote technology sharing. Changing materials requirements among customers (e.g. the shift from metal to plastics) and innovations such as components evolving from mechanical to electromechanical to electronic often necessitate the acquisition of new processes and capabilities that may be more economically shared through joint ventures.
- Opportunities for product line extension. Some joint ventures are even encouraged by a customer who might need a particular combination of products or technologies.
- Provide access to new geographic markets. Globalization has proved both expensive and risky for automotive suppliers. One example, Dana recently suffered the loss of DaimlerChrylser “rolling chassis” business for the Dodge Dakota in Brazil when production was discontinued. The investment in a greenfield site has been lost. Again, joint ventures can minimize asset investment, gain access to local customers, and provide “learning options” to acquire local market expertise.
Beware of potential pitfalls, however
On the downside, joint ventures may turn out to be less successful than originally envisioned. Before entering into an agreement, you must consider the following:
- In the joint venture agreement, both parties need to spell out everything in advance. The process you should go through should mimic the due diligence process you would perform in making an acquisition. A joint venture relationship may not have quite the same barriers to exit that accompany an acquisition, but the economic ramifications to you may be nearly as great.
- You will need to balance economic incentives between you and your partner to ensure both parties have a stake in making the venture successful.
- Especially when partnering with a foreign country, differences in accounting systems or business ethics can be a major stumbling block.
- Joint ventures based on technology sharing can easily turn into technology transfers with inadequate remuneration.
On balance, however, joint ventures, properly structured and focused can help suppliers take advantage of profitable opportunities. A recently publicized example is the agreement between Siemens AG’ s electronics business and Yazaki’s wiring harness operations to supply electrical and electronic distribution systems to Ford, Renault and BMW. The shift to 42-volt electric systems in vehicles is but one of the technological advances that will continue to drive this type of combination.
Johnson Controls has also partnered with Yazaki to pursue the integration of wiring into interior systems and to design 42-volt architectures. Other JCI “Peer Partners,” as they call them are Gentex, for the integration of Home link transceivers into mirrors, Nokia, for the use of wireless technology, and SAGEM for the design and production of cockpit electronics and instrument clusters.
Each of these examples provide the ad- vantage of spreading costly investment in technology across a broad customer base without requiring a substantial cash outlay for new physical assets.