Dana Corp.'s proposed $4.2 billion acquisition of Echlin Inc. will be a big test of whether the auto industry's drive to consolidate the supply base will yield not only cost savings but more capable parts makers.
Automakers and suppliers refer to this as the synergy strategy. Synergy results when two companies combine to create a new organization that can do things, such as supplying bigger chunks of a vehicle, that they could not have done individually.
Dana promises just that in its acquisition of Echlin, though details are sketchy right now.
'It will be important to put some meat on the bones of this synergy plan very soon,' said John Casesa, an analyst with Schroder & Co. in New York.
Dana said it can slash $200 million in annual operating costs out of Echlin within two years. That estimate is in addition to the savings Echlin itself was promising to achieve in its 'fix or sell' restructuring program already under way.
Looking beyond cost cutting, Dana promises to generate 'significant potential revenue enhancements' by combining its business with Echlin.
Dana's announcement checked a hostile $3 billion takeover bid for Echlin that was launched in February by SPX Corp. of Muskegon, Mich. In taking its case to Wall Street and Echlin shareholders, SPX said it could produce $175 million in annual savings out of Echlin's organization within two years.
Echlin, based in Branford, Conn., argued that its mix of original-equipment and aftermarket parts operations was not a good fit with SPX, which makes dealer service equipment and OEM parts.
About one-third of Echlin's $3.6 billion in annual sales are tied directly to automakers. The rest go to the aftermarket. Brake and engine parts are its main products. Echlin is No. 45 on the Automotive News list of top original equipment suppliers to North America.
Dana's acquisition of Echlin, which still needs shareholder and regulators' approval, would solidify Dana's position as the largest independent automotive supplier in North America.
Casesa sees some obvious areas in which Dana and Echlin can combine product lines and gain a bigger foothold with customers by supplying complete systems.
In engine parts, for example, Dana has a large business in internal parts, such as piston rings and cylinder liners. Echlin has a big presence on the outside of the engine with such components as fuel pumps, oil coolers and emission controls.
By integrating many of those parts into systems, Dana has an opportunity to supply more engine content. Casesa said that would let Dana compete better with Federal-Mogul Corp., which has a head start in the engine systems business.
And, in both the OEM and aftermarket businesses, the Dana-Echlin combination should yield benefits.
Said Casesa: 'Where Echlin has great relationships in the aftermarket, Dana has great relationships with automakers.'