Why? The economic aftershocks of the Sept. 11 terrorist attacks have pushed the value of auto suppliers, which already were depressed, even lower. The squeeze on profits means that some troubled suppliers, who have resisted selling in hopes of higher prices, now may have no choice.
That means it's a buyer's market for deep-pocketed investment firms willing to take the risk of buying troubled companies and try to rebuild profits.
"There is plenty of money available for ailing or turnaround companies, provided the price is low enough," said investment banker John Eberhardt Jr., senior managing director of Austin-Pierce Ltd. in New York.
That's what Jay Alix, who specializes in troubled company buyouts, is counting on. "We saw the recession coming nine months ago so we kept our powder dry."
Alix's strategy to buy, fix and sell troubled companies for a profit has reduced his portfolio from 15 companies to six, so he's ready to pounce. Alix is managing principal of Questor Partners Fund LLP of Southfield, Mich., a buyout fund with enough equity capital to leverage $2 billion worth of acquisitions.
"We think the next 12 to 18 months will be a very good time to be buyers," he said.
He's not alone. Bear Stearns Merchant Banking group has raised a war chest with $1.5 billion in buying power and the auto parts sector may be on its radar screen.
Stockman on the moveDavid Stockman and his Heartland Industrial Partners in the past year rolled up undervalued parts makers such as MascoTech Inc. and Simpson Industries Inc. to create Metaldyne, a large Tier 2 metal-forming supplier.
Stockman is in the middle of deal to acquire Textron's TAC-Trim business to complement interior supplier Collins & Aikman Corp., in which Heartland has a 60 percent stake.
Investment banker Jeff Sands says buyout funds have their attention riveted on values that are at a record low for public companies.
As for private companies: "We're seeing an onslaught of bankruptcies because more and more suppliers are running out of cash," said Sands, managing director for the automotive group at Raymond James & Associates in Detroit.
Not every financial buyer has Alix's stomach for sick companies. He's well prepared because he also operates a successful corporate turnaround business.
Resistance reducedThe events of Sept. 11 reduced companies' reluctance to sell because many lack the financial resources to hold on. Bank credit is more difficult to obtain as recession looms.
Financial buyers, also know as private equity groups, have the cash, but even their credit is limited. The high-yield or junk-bond market essential to leverage buyouts remains weak. To keep their 20 percent-plus returns, buyers must either put more capital into a deal or get sellers to lower their prices.
Suppliers have lost value, according to investment bankers. "They would like to sell now if they could get the price they were worth five years ago, but the economics has changed," one banker said.
Suppliers have given away their profit margins through price cuts to automakers, while picking up business with a lower profit margin.
Even the financing environment has complicated deals for private equity investments. One deal under scrutiny is the $1.4 billion loan package planned by Stockman to support Collins & Aikman's purchase of the Textron trim unit, according to the Daily Deal, an industry publication.
Dan Treadwell, a Heartland partner, declined to comment.
Because of the post-attack economic turmoil, deals now take longer and require more capital, and only the best are getting done, buyers maintain.
Shift from strategic buyingUntil recently strategic buyers dominated the industry's deal making. Lear Corp. completed 15 major acquisitions from 1995 through 1999. Tier 1 suppliers grew quickly by acquiring companies that gave them the ability to produce modules, or chunks of vehicles.
They could afford to pay more for acquisitions than financial buyers could because their operating expertise and cost-cutting ability allowed them to cut duplication of efforts.
But strategic buyers have been sitting on their hands for more than a year, according to First Union Securities Inc. of Charlotte, N.C. First Union's measure of global mergers and acquisitions, which consists mostly of North American deals, declined every quarter last year.
The number of deals during the first six months of 2001 fell 56 percent compared with the same period last year. The transaction value of those deals fell 75 percent to $2.6 billion, according to First Union.
Supplier giants no longer have the high-flying share prices used to acquire other companies. Using borrowed money for deals is tricky even as interest rates have fallen.
High debt loadsSixteen of the top public parts makers have debt loads equal to 50 percent or more to their total capitalization, according to McDonald Investments of Cleveland.
McDonald analyst Brett Hoselton said most companies want to unload noncore or unprofitable business picked up along with earlier acquisitions. But, he said, "there are few buyers with cash."
What lies ahead for the parts industry may baffle even its top executives. A prestigious New York meeting scheduled for last week to assess the industry's outlook was canceled. Speakers were to have included Richard E. Dauch, chairman of American Axle & Manufacturing Holdings Inc.; Joseph Magliochetti, chairman of Dana Corp.; and Michael Johnston, president of Visteon Corp.
Said a spokesman for sponsor Credit Suisse First Boston: It's hard enough now to forecast fourth quarter 2001, let alone 2002.