After a transatlantic struggle to acquire LucasVarity PLC, Federal-Mogul Corp. decided it couldn't afford the prize.
The all-cash bid of nearly $6.5 billion offered by TRW Inc. proved insurmountable to Federal-Mogul, which has spent $6 billion during the past year on 10 acquisitions.
Automotive analyst Efriam Levy said LucasVarity would not have generated the financial returns that Federal-Mogul of Southfield, Mich., needed to justify the acquisition. 'They might as well have put their money in the bank,' said Levy, of Standard & Poor's.
That left TRW, of Cleveland, to proceed with its offer of $6.53 billion for the world's second-largest supplier of automotive brakes. LucasVarity rejected Federal-Mogul's lesser offer, made up of cash and stock.
LucasVarity posted sales of $6.8 billion for the fiscal year that ended Jan. 31, 1998 - $5.6 billion from automotive and $1.2 billion from aerospace operations. Net income was $223.7 million.
Federal-Mogul's early calculation that it could at least match the $200 million a year of gains that TRW said it can achieve from the merger by 2001 may have overly optimistic. Federal-Mogul dropped its takeover effort last week after a 'due diligence' review of LucasVarity's books.
Levy said the London-based supplier failed to meet the 'economic value added' principal that guides Federal-Mogul. Economic value added requires that profits are higher than the annual cost of capital. In Federal-Mogul's case, the goal is to achieve operating profits at least 12 percent in excess of the cost of capital.
Had Federal-Mogul bid higher, the offer almost certainly would have included more cash. That could have had a negative impact on the company's debt; some bonds are already rated at junk status, according to Moody's Investors Service.
Winning LucasVarity would have strengthened Federal-Mogul's brake business, said Merrill Lunch analyst Darren Kimball. It also could have helped the company commercialize its twin-disc technology and strengthened its aftermarket and engine systems groups, he said.
Still, investors punished Federal-Mogul for what could have become a bidding war for LucasVarity. Federal-Mogul stock was $63.25 before it announced its bid. It closed last Thursday, Feb. 11, at $55.63, a 12 percent decline.
Kimball said investors have made it clear they want Federal-Mogul to 'place a little more distance between its next large deal and its last one,' the 1998 acquisition of Cooper Automo-tive. He said Federal-Mogul will have to post several quarters of strong results to win renewed enthusiasm from investors.