Arvin merger: 'A disaster' for Columbus and the company, former city official says

By Boris Ladwig, The Republic City Editor

First of a four-part series

The creation of ArvinMeritor Inc. in 2000 was a disaster for Arvin and Columbus, a former city official said.

And the rationale behind the merger clashed with the growth strategy that had been employed by a previous chief executive, a former company executive and city councilman said.

Arvin was healthier before the merger, said a local economist who analyzed some financial data.

"I believe the merger ... was a mistake for Meritor and a disaster for both Arvin and Columbus," said Brooke E. Tuttle, former president of Columbus Economic Development Board.

"The mistakes made were several. First, the merger was not necessary. Second, it was not a 'merger of equals,' as publicized and third, (Arvin CEO) Bill Hunt mistakenly thought he had support from his board of directors."

Hunt was Arvin Inc.'s chairman, president and chief executive officer at the time of the merger. He was to succeed Larry Yost as CEO of the merged company but left the company in summer 2001.

ArvinMeritor paid Hunt $12.4 million after his resignation. He formed a venture capital firm in Indianapolis.

At the time of the merger and again in January 2006 at the Columbus Chamber of Commerce's annual meeting, Hunt said the merger was vital to Arvin's survival.

"Everybody believes that being larger is imperative," Hunt said in 2000. "The only way to grow right now was to do something like this."

Last year he said that without the merger, Arvin might have faced bankruptcy like other automotive parts suppliers.

"We merged to survive," he said.

Tuttle said he doesn't "believe the premise that Arvin couldn't exist as a $3 billion company."

"It had a highly respected market niche ... existed for 90 years (and) was profitable in a very tough, competitive manufacturing environment.

"When it merged with Meritor, Arvin lost its way - attention, respect, focus, resources - within the newly formed company.

"As a result, Arvin lost its niche in the market and became one of many divisions of a larger company competing for attention, respect, focus and resources rather than competing in the marketplace."

Analysts skeptical

In particular, the two companies' strategy to apply Arvin's emissions expertise to Meritor's heavy-duty truck business did not work as expected, said Peter Nesvold, an analyst with Bear Stearns in New York City.

ArvinMeritor announced this month that it has agreed to sell its Emissions Technologies Group, which includes the local Gladstone Plant and Walesboro Tech Center.

"I was extremely surprised when they announced the sale of that business," Nesvold said.

Even as recently as nine months ago, the company continued to talk about the opportunities in that business, particularly in light of ever more stringent emissions standards imposed by the government, he said.

Other industry analysts had eyed the merger with skepticism when it was announced.

"On a scale of 1 to 10 ... this probably rates like a 6 or 7," said Brett Hoselten, at the time with Cleveland-based McDonald Investments.

Hoselten also said that estimated cost savings of $50 million in 2001 and $100 million by 2003 are "not necessarily ... significant" for a $7.45 billion company.

And Ron Tadross, at the time with Credit Suisse First Boston, said opportunities for the companies to sell their products to each other's customers are limited.

Such opportunities typically occur between two light- or two heavy-vehicle suppliers, Tadross said - not, as in this merger, between a light- and a heavy-vehicle supplier.

And even potential opportunities to apply one company's expertise to another's products would not be profitable easily or quickly.

"It's going to take a lot of time," Tadross said.

"It's going to be very challenging," Hoselten said.

Different strategy

Former Arvin executive John Brown said the merger between Arvin and Meritor automotive was at odds with the growth strategy employed by former Arvin CEO James Baker.

Brown served as Arvin's vice president of community relations. He also was a Columbus city councilman.

When Brown joined Arvin, the company underwent rapid change, and Baker decided to expand the business by building on the company's expertise.

Arvin was making exhaust systems for new vehicles, so in the mid-to-late 1980s, it expanded into making exhaust systems for the replacement market by buying Maremount. With that purchase, Arvin acquired the Gabriel aftermarket shock business and expanded into the shock business for new vehicles.

Brown said that the strategy made the company larger, but also removed some of the exposure to the automotive market's cyclicality: The theory was that if the economy soured and sales of new cars slowed, people would require more replacement parts because they were keeping their old cars longer.

Arvin used the same approach with international acquisitions and partnerships, including with Japanese exhaust maker Sango and Japanese shock manufacturer KYB.

That approach helped buffer the peaks and valleys in any economic cycle, Brown said.

The strategy of finding overlapping interests worked, Brown said, and Arvin grew immensely.

But there was no overlap in the ArvinMeritor deal, he said.

Tadross agreed in a research note in 2000, according to Dow Jones.

"The merger of these two companies does not offer the combined company meaningful revenue synergies or critical mass in any one part category," Tadross wrote.

"The miniscule cost synergies underscore the fact that there is very little product overlap of the two businesses."

ArvinMeritor's struggles in recent years partially are a result of its dependence on the Big Three American auto makers, said Phil Powell, evening MBA faculty chair at Indiana University's Kelley School of Business.

Ford, General Motors and Chrysler have cut 110,000 jobs in the automotive industry in the last few years.

That affects suppliers, Powell said.

In 2006, 36 percent of ArvinMeritor's sales came from the Big Three.

Smart suppliers are finding other customers, Powell said.

The only way that a new version of Arvin is going to survive is to try to serve somebody different, such as Japanese auto suppliers, which have a higher perceived quality, he said.

Many auto suppliers have abandoned certain components businesses in the last few years, said Nesvold, the industry analyst with Bear Stearns.

Most of those suppliers will say that they plan to diversify and deliver to some of the Japanese auto makers, but very few actually have been successful, Nesvold said.

Better before merger

"Arvin, before the merger, turned in better results than ArvinMeritor has done (and) Arvin was better at creating value than ArvinMeritor has been," said James C. Smith, senior lecturer in finance and co-director of the Center for Econometric Model Research at Indiana University's Kelley School of Business.

Smith analyzed some financial data, including sales growth, change in employees and return on invested capital, in three-year periods pre- and post-merger for Arvin and ArvinMeritor.

He cautioned that the two periods occurred under different economic conditions and that the companies' product lines were different.

But he said "there is pretty clear evidence that Arvin was building value, and ArvinMeritor has been struggling with a shrinking value."

Among Smith's findings: