Family owned suppliers find they have real power

Germany’s base of family owned suppliers has long been expected to sell out — one-by-one — to rich, publicly owned rivals.

But as the industry has slowed, many of the leading private companies still look strong, while public companies have run into trouble.

In a surprising reversal, privately owned suppliers seem ready to start buying publicly traded suppliers.

“The next 18 or 24 months may be a window for them,” says Klaus Pflum, managing director at Deutsche Bank, Investment Banking.

Investors’ fears about the outlook for the automotive sector mean publicly traded suppliers can’t grow by buying companies with capital raised from new share issues.

Supplier share prices are so low the companies have to focus on cash flow and the short-term bottom line just to stay independent.

Strategies in disarray

This has thrown the strategies of some public suppliers into disarray.

Continental lost shock-absorber maker Sachs to privately owned ZF Friedrichshafen, and then on Sept. 12 lost

its CEO, Stephan Kessel, follwing a strategy disagreement with the supervisory board.

The company’s plans to sell its cash-generating ContiTech business to invest in more chassis and electronic control businesses have been delayed.

Two days earlier, privately owned German bearings maker INA group launched a surprise hostile takeover bid for public bearing and wheel-system supplier FAG.

Why are private companies doing so much better than the public suppliers?

“The advantage of private ownership lies basically in the long-term orientation of both shareholders and management,” says Horst Geidel, CEO of family owned Behr, the heat-exchanger specialist in Stuttgart, Germany.

The private groups have been financially conservative and focused on their core businesses over a long period.

Most of Behr’s profits are not distributed to shareholders, says Geidel, and investments are mostly financed internally.

The families draw only as much from the company as they need and “we can concentrate on the long-term success of our company instead of looking only for short-term results,” says Geidel.

Micheal Stoschek, CEO of privately owned door modules and seat mechanisms supplier Brose, agrees.

“Continuity on the part of the owners, and often in the management, is conducive to long-term, objective-oriented corporate policies instead of hectic shareholder value orientation,” he says.

Cost awareness

Regular dividend payments to shareholders have been less than 10 percent of the annual surplus, says Stoschek, and Brose has financed its expansion with its own funds since the company was founded 82 years ago.

Stoschek says private ownership means the company’s management “has a pronounced awareness of costs.”

That financial conservatism makes the private companies attractive lending prospects, says Deutsche Bank’s Pflum.

“They were very careful in their acquisitions, and they did small things that fitted into their structures and did not go into diversified stuff (in the past),” he says.

That gave them a focus and robustness the public suppliers are trying to catch up with.

Now that the slowdown is here, private suppliers can make a big leap, says Pflum.

“If these guys went to the capital markets, they would be welcomed strongly,” he says.

“They should be able to tap the markets with quite interesting interest rates.”

Deutsche Bank estimates that automotive suppliers with sales of $20 billion annually are for sale, and conservatively managed private suppliers are well placed to raise the money to buy them.

Despite the downturn, the long-term pressures on suppliers remain the same, says Pflum.

“Going forward, they will have to globalize,” he says. “There is no way around that.”

Now may be the time.

Says Pflum: “The market is getting really cheap again, and it makes sense.”

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