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The Best Defense?
Echlin counteroffensive paints disastrous picture of SPX combination
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Business New Haven
4/6/1998
By: BNH
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As it struggles to stave off the wolf at the door, the Branford-based Echlin Inc. is looking to convince shareholders and analysts that the firm is already in the best possible hands.
On March 25, special legislation that would have forestalled a $3 billion hostile takeover bid by rival auto-parts makers SPX Corp. went down to defeat by more than a two-to-one margin Hartford. As a consequence, Echlin must accede to a demand to convene a special shareholders meeting within 60 days. At that meeting, SPX will attempt to oust Echlin directors and replace them with a board that would move to sell to SPX.
That's not going to happen without a fight. At a March 31 meeting with financial analysts and investors in New York, Echlin chairman, president and CEO Larry McCurdy unveiled an aggressive business plan that he said would generate earnings considerably higher than analysts' present expectations.
McCurdy pointed out that the consensus earnings estimate for Echlin's 1998 fiscal year, which ends August 31, stands at $2.28 per share, whereas Echlin expects to achieve approximately $2.40 to $2.50 per share. That represents a 28- to 33-percent gain over the $1.88 per share earnings (before special charges) posted in fiscal 1997.
McCurdy also painted a rosy picture of future earnings, predicting a rise to the $3.65 to $3.80 range for fiscal 1999, followed by $4.40 to $4.55 per share in fiscal 2000.
On what does he base such optimism? McCurdy based his projections on a rapid and successful implementation of Phase I of Echlin's “repositioning” program, as well as to new initiatives he outlined for Phase II.
Phase I is characterized by a reorganized and simplified corporate structure; adoption of economic value added (EVA) principles; extensive cost-reduction; continued divestiture of underperforming and non-core assets; and acquisitions of complementary businesses.
Phase II, according to McCurdy, would bring a worldwide sourcing initiative; realignment of the company's North American distribution operations; shared services and new system software; and strategic acquisitions not included in present projections.
“One year ago, Echlin's board of directors installed a new management team to bring change to this company, and positive change - together with value creation - is now being successfully realized in rapid and effective fashion,” McCurdy said.
McCurdy also decried the “lack of business logic” of an SPX-Echlin combination, and warned of potential negative consequences to shareholder value should the deal go through.
“There are very few synergies between Echlin's operations and SPX's, and the resultant cost savings of a combination would be considerably less than those SPX currently estimates,” said McCurdy. “Moreover, SPX does not appear to understand Echlin's business, and a combination of our two companies, along the lines SPX spelled out in its new distribution concept, would be extremely destructive to our long-term relationships with customers.
“Already,” McCurdy added, “we have had many of our major aftermarket customers voice overwhelmingly negative reactions, and warn us that a combination with SPX would severely risk ongoing business with them. This would result in a considerable loss of value for Echlin shareholders.”
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