GREENWICH, Conn. - As a young Michigan congressman, David Stockman opposed Lee Iacocca and the government's 1979 bailout plan of Chrysler Corp. Now the Reagan administration budget czar has found a new allure in smokestacks and auto parts.
And he's prepared to spend up to $8 billion to prove that he can retool part of North America's automotive supply base.
Stockman's Heartland Industrial Partners LP is buying small to medium-sized auto parts makers to form the nucleus of two giant automotive suppliers, a 'metals platform' and an 'interiors platform.' Each is expected to grow to as much as $7 billion in sales within six years.
Stockman plans to recover his massive investment when the companies are sold to investors through a public offering.
It won't be easy. Stockman is trying to build his empire at a time when the economy is cooling, and his mettle as an industrial financier has yet to be tested by a recession. What's more, automakers cast a wary eye on so-called financial buyers, such as Stockman - no matter how strong his name might be.
An eye for opportunity
But Stockman, 54, always has been quick to spot an opportunity. After two terms as a Republican congressman from western Michigan, he threw in his lot with the Reagan revolution. In 1981, at age 34, he became Ronald Reagan's director of the Office of Management and Budget.
Today he sees a vacuum in the auto industry. Until recently, suppliers such as Lear Corp., Federal-Mogul Corp. and TRW Inc. were boldly consolidating the automotive supplier sector. That activity has cooled as stock prices have shrunk and balance sheets have become loaded with debt.
But the climate has yielded bargain prices on Tier 2 suppliers - companies that lack the financial wherewithal to lead a consolidation. So Stockman is trying to build his own giants. In doing so, he could reshape the industry.
These Tier 2 companies, such as Simpson Industries Inc. and MascoTech Inc., have strong fundamentals but a depressed share price. This prevents them from raising the capital needed to scale up with the size and technology necessary for new markets and greater earning power.
His plan is to buy a batch of related companies to create one-stop, full-service 'supplier platforms' determined to grab 'vertical market share' by doing the menial tasks that no longer interest Tier 1 suppliers.
'The Tier 1s are moving toward delivering large modules and integrating the assembly of components,' Stockman said. 'They don't want to make molded carpet or run injection plastic machines anymore ... that's what we want to do.'
Craig Fitzgerald, a partner with consulting firm Plante & Moran LLP of Southfield, Mich., sees the strategy as sound. 'The challenge will be to provide sufficiently terrific solutions that they are able to recover their engineering costs and earn a profit to boot.
'That's easier said than done,' Fitzgerald said.
Other challenges? General Motors procurement chief Harold Kutner has had more than one battle with a leveraged buyout firm. He and his peers at Ford Motor Co. and DaimlerChrysler prefer that parts makers - not financial buyers - consolidate the supplier industry.
The automakers know Stockman's reputation will attract copycat financiers. They recall all too well the buyout frenzy in the 1980s that generated quick profits for investors who then flipped out of the deals and left their companies struggling.
Automakers worry that financial returns for these owners will take priority over quality and delivery, said a spokesman for one car company.
Stockman understands. In 1999, as a senior managing director of the Blackstone Group, he led an unsuccessful 1999 effort to acquire UT Automotive.
Ford Motor Co., UT Automotive's largest customer, was widely believed to have tilted to the winning bidder, Lear.
But Stockman hopes Heartland will be viewed differently than other buyout funds.
When he was with Blackstone Group, Stockman saw a new day dawning for heavy manufacturing.
So he led the buyout firm on a series of industrial acquisitions, including American Axle & Manufacturing Holdings Inc. of Detroit. Blackstone pumped $2 billion into American Axle, arguably the most successful of the parts operations spun off by GM.
That 1997 deal convinced him to strike out on to his own.
'I saw the opportunity to build a platform,' he said, 'But it would take a lot more time and a lot more patience and a lot more willingness to get involved with the nitty gritty of the industry than what is normal for New York private equity funds.'
So in September 1999, he launched Heartland. He quickly raised $1.2 billion, the capital need to attract billions more in bank loans.
By August of last year he agreed to pay $1.9 billion for metal former MascoTech Inc.
A month later, he had an agreement to acquire Simpson Industries Inc., a precision machining company, for $377 million. In December, Global Metal Technologies Inc., a casting company, agreed to a price of $177 million.
Even as Stockman was building his 'metals platform' called Metaldyne Corp., he closed on a $1.3 billion deal to acquire majority control of interior trim supplier Collins & Aikman Corp. - the basis of his second automotive platform, in interior trim.
Great time to invest
As budget chief, Stockman became the lightning rod for Reagan's 'supply side' economics, which led to massive budget deficits.
After he criticized the Reagan plan as 'fiscal knownothingism' that threatened to damage the economy, the president gave Stockman a well-publicized verbal whipping. In 1985, Stockman resigned.
Today he believes that a culture of risk taking, low capital gains taxes, free trade and solid monetary policy from Alan Greenspan now means a strong economy - and a great time to invest in the auto industry.
What about the looming downturn? He's not thrilled about it, but he is taking the long-term view.
Everything comes down to money, and Stockman is prepared. Buyout funds leverage their acquisitions with a large percentage of debt from banks and other sources. Bank and other debt supplied 70 percent of the $2.4 billion total price for MascoTech and Simpson.
Stockman's reputation attracted top-tier investors, including DaimlerChrysler's pension fund, Detroit banking company Comerica Inc., insurance company American International Group Inc. and others.
It's no surprise to John Eberhardt Jr., managing director of investment banking concern Austin-Pierce Ltd. of New York. 'Stockman,' he said, 'can raise his hand and billions of dollars will come to his doorstep.'