ArvinMeritor to Spin Off Light-Vehicle Supplier Business

ArvinMeritor announced yesterday that it is to split its commercial and light-vehicle supplier (LVS) divisions into separateentities, following a wholesale internal review of the business. The new company, to be called Arvin Innovation, will be wholly owned by ArvinMeritor's current shareholders via a pro rata tax-free dividend, and headed up by Ford veteran and former Ford Group vice-president, Phil Martens.

ArvinMeritor's current chief executive officer (CEO), Charles (”Chip”) McClure, will continue as CEO of the commercial division. "Each company will benefit from a greater strategic focus on its core business", McClure said. The two companies will become totally separate following the spin-off, with no future links between them. McClure added that the timing of the spin-off was chosen for several reasons, including opportunities arising from the downturn in the automotive markets. "And we have two solid management teams. We felt good about moving forward with these teams", he said.

The deal completes the dismantling of the 2000 merger of Arvin Industries and Meritor Automotive, brokered by the then Meritor CEO, Larry Yost. Yost later tried to further enlarge ArvinMeritor with a hostile takeover bid for Dana in 2003, an attempt that ultimately failed. "There are different dynamics today", McClure said when explaining the reversal of company strategy, stating, "Focusing on customer needs is more important than providing counter-cyclical protection, which was important at the beginning of the decade."

"Our decision to spin off the LVS business is part of the company's ongoing corporate transformation—our 3R strategy to rationalize, refocus and regenerate—that has been underway for the last three years", McClure said. "Separating these two businesses and successfully implementing our Performance Plus initiatives are major steps in the transformation to build two stronger, more competitive companies for the future”, he added.

"Our LVS business group will have the right leadership team, a solid financial structure, market-leading positions in many of its product lines, a well-diversified customer mix and the global reach to grow this new company as a market leader going forward", McClure concluded.

McClure, formerly CEO of Federal-Mogul, will remain as ArvinMeritor's chairman, CEO, and president. James Marley, currently a board member of ArvinMeritor, will lead Arvin Innovation's board of directors as non-executive chairman. Phil Martens, currently ArvinMeritor's senior vice-president and president, LVS, will become the president and CEO of Arvin Innovation. Jim Donlon, executive vice-president and chief financial officer (CFO) of ArvinMeritor, will begin supporting ArvinMeritor's LVS business group in the capacity of CFO as it prepares to become an independent company. Upon completion of the split, he will become executive vice-president and CFO of Arvin Innovation. Jay Craig, senior vice-president and controller, will replace Donlon as ArvinMeritor's senior vice-president and CFO, effective immediately.

"As a separate independent unit, Arvin Innovation will be better positioned to drive specific growth initiatives, including improving our customer focus and expanding our global presence", said Martens. "With increased flexibility as a stand-alone business, Arvin Innovation will have an excellent opportunity to create next-generation systems technology solutions for our customers around the world. In addition, we look forward to the many new and enhanced opportunities the new organization will provide for our worldwide employees", he added.

Outlook and Implications

The spin-off completes a wholesale turnaround of the strategy of growth via acquisitions adopted by former Meritor CEO Yost. Since 2004, when Yost was replaced by McClure, ArvinMeritor has adopted a strategy of divesting parts of its business and focusing on core competencies and supporting its global LVS OEM customers and its commercial vehicle systems OEM and aftermarket customers. The first to go was the Light Vehicle Aftermarket (LVA) business, which the company began to break up in 2004, completed by 2007. In the last few years, ArvinMeritor has continued to streamline its LVS business unit. Capacity has been reduced at 10 of its facilities, a management team has been established in China, and systems to diversify the customer base have been introduced in South Korea, India, and China.

In February 2007, ArvinMeritor sold its Emissions Technologies business group to private equity concern One Equity Partners (OEP), an affiliate of J.P. Morgan Securities Inc., for approximately US$310 million. The company said at the time that it believed the business would be better served by an organisation that was specifically positioned to invest capital and management resources in its development and growth. ArvinMeritor acknowledged that the decision to sell its Emissions Technologies business was part of its long-term strategy to refocus the company and concentrate on the strengths and core competencies that will generate future earnings growth.

The spin-off of the LVS business into Arvin Innovation completes the process of dismantling the company into its two essential core sectors, light vehicles and heavy commercials. The separate divisions will now be free to pursue organic growth opportunities, but it remains to be seen whether the separated divisions will attempt another redefinition of its core operations in the near future and shrink further in scale as a result. Some acquisitions may be on the agenda for the medium term, as hinted by McClure's statement that the downward trend in the automotive sector could present opportunities, but this looks increasingly unlikely in the short term, despite the improving balance sheet, as the priority remains profit improvement and balance-sheet strengthening and enhancing shareholder value. Furthermore, MCClure did not rule out a sale of the newly created division if, in his words, "we evaluate all our businesses" on a regular basis. There is more value in the whole than in the individual constituents "and more value for the shareholders" with the spin-off, he said.

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