Tenneco’s planned purchase of Federal-Mogul in a deal valued at $ 5.4 billion — and the resulting two-way split of the combined company — could serve as the final chapter for Federal-Mogul after 119 years in business. It could also put an end to more than two decades of pushback over whether the supplier should compete with its own retail parts customers.
This is a robust case study for business students to analyze how such a once-solid ball bearings supplier found so many ways to complicate its existence and ultimately get eaten up by modern supply-chain realities.
Federal-Mogul makes parts for both automakers and the aftermarket. These kinds of auto parts — ball bearings, gaskets, pistons, powertrain components and spark plugs — have never been a glamorous part of the auto industry. Suppliers in those commodity lines have long struggled to find new ways to build a better mousetrap, cut costs and grow their business. Sometimes they grow organically. Sometimes they grow through acquisition.
Federal-Mogul’s answer twice, directly or indirectly, has been to compete with its own aftermarket parts customers.
In 1995, then-CEO Dennis Gormley wanted to launch a chain of 500 auto parts stores that would, in effect, compete with Federal-Mogul’s aftermarket customers. He even built a $ 500,000 prototype store on Federal-Mogul’s headquarters campus in Southfield, Mich., to show investors his brainchild to build revenue and boost stock price. He had it torn down in two weeks, but aftermarket customers were not happy about the plan, which ultimately was nixed.
Gormley was replaced as CEO the following year by Richard Snell, who launched an acquisition plan called the Big Hairy Audacious Goal. He aimed to boost revenue from $ 2 billion to $ 10 billion by 2002. Trouble is, one of those acquisitions ended up with an asbestos liability that ultimately forced Federal-Mogul to file Chapter 11 bankruptcy. The company was hampered by court protection for more than six years, wracking up Big Hairy Audacious legal bills estimated at more than $ 500 million.
Enter legendary Wall Street investor Carl Icahn. He gained control of the supplier in bankruptcy court in 2007 and toyed with various restructuring plans for years. Over the last few years, his investment firm launched an aggressive multibillion-dollar acquisition binge into — you guessed it — auto parts retailing and auto service centers. As Bloomberg reported, customers such as AutoZone and O’Reilly Automotive were unhappy with Federal-Mogul being both their supplier and competitor.
But Icahn isn’t stupid. He saw an opportunity to sell Federal-Mogul for a tidy profit and create an arm’s-length distance between his interests and his customer/competitors.
It’s a potentially happy ending for the company and also for Icahn’s investment. But it’s also the ending of a once-great auto supplier that helped build the industry. Other established suppliers in the commodity parts world would be wise to study this company’s history closely.
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