The acquisition engine that transformed companies such as Lear Corp., Dana Corp., Johnson Controls Inc. and others into global powerhouses is sputtering.
For the first time since the beginning of the current consolidation wave, some acquisition-minded companies have recorded a lower return on two key profit indicators than their slow-growing brethren.
'The industry is at a crossroads,' said Randy Barba, a partner with Andersen Consulting of Chicago. The financial slowdown 'raises real questions about the sustainability of the consolidator business model,' he concluded in a report co-authored with partner Umar Riaz.
Worse, unbridled acquisitions accompanied by heavy debt could lead a major supplier into the same critical misstep as Breed Technologies Inc., the Lakeland Fla., airbag company now in bankruptcy court.
Results of Barba and Riaz's study of 25 of the world's top automotive suppliers appear at odds with conventional wisdom. Aggressive consolidation during much of the 1990s was the route to improved financial and operating performance.
BUY AND PROSPER
Indeed, during the five years ending in 1997, the acquisition-minded companies - those with six or more deals since 1992 - substantially outperformed companies with five or fewer acquisitions.
To grade the companies, the researchers used a financial yardstick called 'total shareholder return,' which tracks the total increase in the price of a company's stock plus dividends reinvested.
On average, the acquisition-minded companies boosted sales, operating profit margin and market capitalization faster than low acquirers did.
But by 1997, median total shareholder returns for high acquirers fell below that of low acquirers for the first time since 1992. For the first time since the beginning of the current consolidation wave, their return on assets and cash flow also lagged.
What went wrong? Barba and Riaz found that some of the big dealmakers overpaid. Others bought too many companies too quickly. Moreover, the easy acquisition targets are gone.
TOO MANY, TOO FAST
Yet, the buy-or-be-bought mentality means few companies can afford to rest. Less than six months after Lear announced a period of internal digestion, the Southfield, Mich., supplier of automotive interiors made its largest acquisition, the $2.3 billion buyout this year of UT Automotive of Dearborn, Mich.
The consultants concluded that the big dealmakers have been running too fast, bunching acquisitions in close intervals and straining the entire acquisition process.
In some cases, acquirers have bought companies that are still struggling with their own acquisitions. TRW Inc. of Cleveland this year purchased LucasVarity PLC, a company that itself was the result of a merger two years before.
Barba and Riaz contend that mergers and acquisitions transformed a fragmented auto parts industry, creating the scale, skills and geographic position automakers demand.
In turn, the deals led to higher revenue, productivity and operating costs. These gains feed into fatter operating income and share price, which in turn fuel new acquisitions.
This strategy proved to be a growth tool for the industry, Barba and Riaz say. Acquisitions are a faster response to internal growth. They also are simpler than joint ventures. Moreover, Wall Street rewarded companies that grew most quickly.
From 1988-97, the dollar volume of acquisitions grew almost fourfold. Last year, the worldwide value of mergers and acquisitions topped $30 billion.
But now, companies are acquiring firms whose technologies, markets and customers they do not fully understand. In years to come, the winners will be companies with world-class integration skills.
'After the massive wave of acquisitions,' said Barba, 'we're beginning to see the challenges that these companies face in the post-merger integration era.'