The St. Regis Hotel's crystal chandeliers, Louis XVI-style furniture and $5,000-a-night rooms make a posh setting for Wall Street's high-powered money managers.
So it was fitting that Richard Snell, one of the industry's boldest deal makers, invited 100 financial analysts to this luxurious New York hotel in the summer of 1999. Snell, president of Federal-Mogul Corp., wanted to update the analysts about his Big Hairy Audacious Goal. That was Snell's phrase for his plan to expand his company - a Michigan maker of engine bearings and seals - into a $10 billion supplier.
After a string of costly acquisitions, the 60-year-old executive was trying to convince the analysts that he could meet their profit projections. Snell, a man who never lacked confidence, decided to use humor. Imitating television comedian David Letterman, Snell offered joking responses to questions about his acquisition binge. After he read each question from a card, he would toss the card over his shoulder to the sound effect of breaking glass.
As the meeting stretched to three hours, the audience grew uneasy. Federal-Mogul was the industry's hottest growth story, and analysts wanted to believe that Snell would succeed. 'People came out of that meeting feeling better about Federal-Mogul's prospects than before, even the skeptics,' said an analyst who attended. But he and his colleagues were in for a nasty surprise.
Just two months later, Federal-Mogul sank into a mire of missed earnings reports, asbestos litigation and bungled efforts to integrate its newly acquired businesses. Federal-Mogul's stock plunged 91 percent last year to a low of $1.68 per share.
Following the collapse of American suppliers such as airbag supplier Breed Technologies Inc., Cambridge Industries Inc. and Key Plastics LLC, Snell's disastrous experiment has cooled Wall Street's desire for a continuing consolidation of the automotive parts sector. Federal-Mogul's board eventually forced Snell to quit, then asked Steve Miller - Chrysler Corp.'s former vice chairman and a turnaround veteran - to save the company.
Just a few years ago, industry analysts argued that European suppliers should adopt American-style business tactics and grow quickly through mergers and acquisitions. But the rise and fall of Richard Snell is a cautionary tale of the dangers of growth at any cost.
Big Hairy Audacious Goal
Snell formed his plans for Federal-Mogul's growth in 1996, shortly after he replaced former chief executive Dennis Gormley. At the time, Federal-Mogul was struggling to recover from Gormley's ill-fated plan to launch a network of aftermarket retail outlets.
Gormley, with his perfectly coifed silver hair, abundant jewelry and imperious style, looked like Hollywood's concept of a corporate chief executive. While most Detroit executives drove American cars, Gormley drove to work in a Jaguar. But a wilting stock price, heavy losses and a disastrous effort to raise prices for General Motors sent him into early retirement.
At first glance, Snell appeared to be the precise opposite of Gormley. It was hard to believe that this former Tenneco Automotive executive - soft-spoken and shy - was the same man who had assembled 20 deals in three years while heading Tenneco Automotive. But behind closed doors, a different personality emerged.
'He was in your face if you didn't have the right answer,' recalls one former executive. Snell believed that if Federal-Mogul did not grow quickly, eventually it would be gobbled up by a larger rival. 'It was a dare to grow at any cost, grow the corporation's top line,' the former executive said.
Federal-Mogul soon experienced changes big and small. First, Snell got rid of the costly collection of Oriental wedding dresses, Andy Warhol silk-screen prints and native American ceremonial objects that Gormley had displayed in the corporate headquarters. Next, he restructured some of the businesses, refocused the company on manufacturing and then launched his acquisition binge. And at Miller's urging, the company unloaded its unprofitable network of aftermarket retail stores.
Major institutional investors welcomed Snell's growth strategy, known as BHAG, or Big Hairy Audacious Goal. It committed the company to $10 billion in sales by 2002. His strategy: Buy out his rivals in the engine components business, a fragmented industry with few major suppliers.
Snell soon negotiated three major acquisitions. In 1997, he purchased T&N PLC, a British producer of engine seals, for $2.9 billion. A year later, he bought Fel-Pro, an Illinois supplier of seals and gaskets, for $725 million. Soon after, he purchased Cooper Automotive, which makes spark plugs, wiper blades and other aftermarket products, for $1.9 billion. Those deals pushed Federal-Mogul's sales over the $7 billion mark, bringing Snell within range of his sales goal. With the T&N deal accomplished, Federal-Mogul - already the world's leading supplier of bearings - became a world leader in engine seals.
Snell paid a high price for his acquisitions. Fel-Pro was overpriced, said one rival bidder. 'Our bid was 20 percent lower, but we knew Federal-Mogul was on a buying binge and felt they would pay any price,' the executive said.
Warning signs
With the acquisition of Cooper Automotive, Snell expanded the company's aftermarket business. Cooper enjoyed a high profile in the aftermarket with brand names such as Champion spark plugs. But profits were under pressure as the aftermarket shrank. Worse, Snell failed to set up adequate financial controls after the acquisition. That left him with no reliable information from that business. Says a former insider: 'Cooper kept surprising them, and it was the surprises that hurt Federal-Mogul on Wall Street.'
Last year, Federal-Mogul's problems reached a high point when the company's asbestos liabilities soared out of control. Thousands of plaintiffs had filed lawsuits against T&N, claiming that asbestos used in its products made them ill.
Rather than go to trial, Snell moved aggressively to settle the asbestos claims out of court. It was a critical miscalculation. As Federal-Mogul settled the lawsuits, thousands of plaintiffs in Europe and North America buried the company under a second wave of claims. 'It was like throwing blood on the water,' said analyst Charles Brady at Credit Lyonnais Securities Inc. in New York.
Asbestos was not Federal-Mogul's only problem. Two major revenue sources - the aftermarket and the North American market for commercial trucks - suffered downturns. Worse, the company depended heavily on sales to General Motors, Ford Motor Co. and DaimlerChrysler, which were slashing production.
In September, Snell ran out of time. During a Sunday dinner at a suburban Detroit club, Snell warned company Chairman Miller that earnings once again would fall short of projections. Soon after, Snell agreed to resign from the company, and Miller took over as interim chief executive.
Mister Fix-it
Miller, 59, is the son of a prominent timber-owning family in Portland, Oregon. He is no stranger to corporate turnarounds. The Mister Fix-it of the corporate world was Chrysler's primary negotiator with creditors during the company's near-bankruptcy in 1980.
Miller soon became known for his dry humor. When negotiations grew difficult, the Chrysler executive put a toy pistol to his head and warned, 'I'm going to have to kill myself if you guys don't sign this deal.'
In 1996, Miller had helped rescue Federal-Mogul, where he was a member of the board of directors. After Gormley quit, Miller stepped in as interim chief executive and reversed Federal-Mogul's plans to open a string of aftermarket stores.
Four years later, Miller had to save the company again. As Federal-Mogul's problems began piling up last fall, Miller began considering the unthinkable: bankruptcy proceedings. Miller eventually rejected bankruptcy and decided to fight the asbestos litigation. It will be a costly battle. Last year, the company paid $338 million in claims. Total cash payments through 2004 are likely to total $900 million. To cover these liabilities, Miller convinced several banks in January to give him a line of credit worth $550 million. That should provide Federal-Mogul with sufficient liquidity for the next four years.
New blood
Miller also has found a new chief executive for the company. In January, the board appointed Frank Macher, the 59-year-old former president of ITT Automotive, as Federal-Mogul's chief executive. Joining him as president will be Charles McClure, 47, a former senior executive at Detroit Diesel. Both men have long experience working with the Big 3 automakers. That will prove useful as Federal-Mogul tries to protect its original-equipment business.
The company's cash-flow crisis is not over. In 2004, Federal-Mogul must pay off debts totaling $871 million. But Miller believes Federal-Mogul can survive. Despite its troubles, it still dominates the market for seals and bearings, ranking first or second in nine product categories.
While Miller assembles his new management team, Snell still is recovering from the woes of his Big Hairy Audacious Goal. Not far from Federal-Mogul's Southfield headquarters, he spends his days in an outplacement center, seeking a new job.
E-mail writer Robert Sherefkin at [email protected]
