German engine supplier merger hits rough road

Automotive Industries, Feb, 1998 by Stefan Schlott

Kolbenschmidt-Pierburg has the expertise to be a systems-developer, but management may not have a strategy.

After one of the first hostile takeovers in German industry, the merger of suppliers Kolbenschmidt AG and Pierburg AG seems guaranteed. However, the would-be mega-supplier of engine systems and modules has yet to set a clear strategy or management structure. Both companies have lost their top executives, and the designated chief of the merged group can't start work until July because of a no-compete contract with his former employer.

Despite that, a report by consultant McKinsey & Co. predicts the new company will immediately add $8.8 million to its $1.4 billion annual sales from synergies in its existing product line.

Kolbenschmidt-Pierburg AG will have core competencies in pistons and cylinder blocks (Kolbenschmidt's specialty) and air-fuel systems (the Pierburg legacy). Executives aim to market the new company's systems-development expertise using the merged companies' global resources. They will position the new company as a potential supplier and development partner for everything but engine sealing and shafts.

Pierburg's corporate parent, Rheinmetall, went after Kolbenschmidt both for the technical synergies and because the companies have very little overlap. Piston-maker Kolbenschmidt went international well before Pierburg. The U.S. is the only place outside Europe where both companies have separate business structures in place. Pierburg, in fact, opened two new U.S. facilities in the last 18 months. In August, an Auburn Hills, Mich., plant and tech center began producing instruments to measure fuel economy and emissions for customers including Siemens, Delphi and Bosch. A plant to produce fuel modules opened in Fountain, S.C., in October 1996. It supplies the Mercedes A- and M-Class plants, and Volkswagen's Puebla, Mexico, complex.

The companies initially agreed to the merger, but Kolbenschmidt's ardor cooled last year when negotiators could not agree on the companies' respective worth. Kolbenschmidt initially delayed the talks. Then it canceled the already announced merger. Rheinmetall responded by raising its stake in Kolbenschmidt from 25% to 53.5%. Kolbenschmidt CEO Heinrich Binder threw in the towel, quitting the company and moving to another industry. Shortly thereafter, Pierburg chief Wulf Warlitz also quit.

Sources within Rheinmetall do not deny that the acquisition's costly and acrimonious; end led to Warlitzs departure.

The clumsy tactics apparently continued when Rheinmetall chose a boss for Kolbenschmidt-Pierburg. Bosch executive Dieter Seipler has accepted the job, but will not be able to take the helm until his Bosch contract expires in July, leaving the new company essentially rudderless.

The six-month delay has raised questions about why Rheinmetall was so aggressive in rushing the merger in 1997. Some German observers speculate that management was nervous because Pierburg had paid dearly for delays in the past. Pierburg stuck to its carburetor business long after other European suppliers moved their investment and research efforts into fuel injection. As a result, Pierburg is now a regional player in a global business, lagging far behind Bosch, Siemens, Magneti Marelli and Delphi. Pierburg also fell behind in positioning itself as a development partner for fuel systems.

Now, German sources say Kolbenschmidt-Pierburg's status may not remain quo for long. There are already suggestions the new company may be sold to another supplier. Rumored buyers include Mannesmann and Krupp Hoesch Automotive.