Should ArvinMeritor shrink?

DETROIT -- ArvinMeritor Inc. CEO Larry Yost's goal was to create a company with annual sales of $15 billion. He got halfway there.

Three months after its attempted takeover of rival Dana Corp. failed, ArvinMeritor said last week that it is seeking a successor to Yost. The company did not say how long the search may last.

Though ArvinMeritor does not have a mandatory retirement age, Yost turns 66 this month. Yost had put his retirement plans on hold when he went after Dana.

Yost's replacement will inherit a strong undercarriage and corner module business. But the Troy, Mich., supplier lacks strength in such areas as electronics to compete against suppliers that include Siemens VDO Automotive AG and Delphi Corp., which have sophisticated corner module technology.

"The appointment of an outsider, particularly one who might be open to divestitures rather than acquisitions for ArvinMeritor, might be a welcome development," says analyst John Casesa of Merrill Lynch in New York.

Others share that view.

Analyst Robert Hinchliffe of UBS in New York says: "The new CEO will have to decide if the current strategy of getting bigger is the key. Perhaps getting smaller may be the right way to go. To get back to focus."

A breakup could unlock value for shareholders, but dismantling a company with $7.8 billion in sales last year and 150 plants in 27 countries would be difficult.

Then there is the matter of what to do with the company's debt, pension and other liabilities. ArvinMeritor's debt is $1.54 billion, or nearly 62 percent of its capital. That is second only to Collins & Aikman Corp., according to Standard & Poor's.

Hinchliffe describes ArvinMeritor as a collection of assets without many compelling synergies. For example, its Roll Coater coil-coating business is profitable and generated sales of $166 million last year. But the business makes refrigerator coils for General Electric.

And ArvinMeritor's aftermarket division is saddled with shrinking markets for its main product lines, Hinchliffe says. Tenneco Automotive Inc. recently displaced ArvinMeritor for an exclusive deal with retailer

Pep Boys for replacement shocks and exhaust systems.

Analysts also question the benefit of ArvinMeritor's door, roof and sunroof business, saying it could be sold to pay down debt.

Michael Heifler of Deutsche Bank Securities Inc. in New York says: "The next CEO must ensure that ArvinMeritor address real system or module growth opportunities where the company has a shot to be a dominant player. That's different than having high market shares in commodity-like components."

On the upside, the next CEO stands to inherit a resurgent heavy-truck business for the company's large commercial-vehicle driveline systems division. And its international business is strong, especially in China.

Last year's proposed buyout of rival Dana, of Toledo, Ohio, would have been Yost's crowning deal. It would have combined Dana's driveline and frame business with ArvinMeitor's core undercarriage and exhaust system business. The takeover bid collapsed last November.

Yost built ArvinMeritor from a spinoff of Rockwell Automotive in 1997, several joint ventures and a merger with Arvin Industries Inc. in 2000.

Says ArvinMeritor spokeswoman Lin Cummins, "The new CEO is inheriting a great company with a realistic vision."