In November, toolmaker Gerald Hobson listened in on a presentation by a growing automotive plastics part supplier. The company executive laid out the firm's acquisition strategy, its sales numbers, and its long-term plans for the future.
"After he was done, I said to myself that I wished I had a piece of that company," said Hobson, the president of Hobson Mould Works Inc. of Shell Rock, Iowa. "It was very impressive."
Last month — four months after Hobson heard about Key Plastics LLC at the conference — the company entered bankruptcy court, filing for protection from creditors under Chapter 11.
"Now I'm saying to myself that I'm glad I didn't have any money in that company," Hobson said. "I'm shocked at what happened."
But the change in fortune also left him wondering what happened.
How can a well-established business with a half-billion dollars in annual sales find itself so swamped by debt that it ends up in bankruptcy court?
Analysts who follow the automotive plastics industry say Key acquired too much too quickly, without taking the time to digest its purchases. At the same time, it faced pricing pressure from its Tier 1 customers.
Analysts say businesses throughout the auto industry are at risk, overleveraged and working with a financial house of cards that could fall if even one element of their fiscal plan fails.
"This bodes to what can happen to anybody in the plastics industry if sales go down even slightly," Jeffrey F. Mengel, a partner in consulting firm Plante & Moran LLP's Southfield, Mich., office, said in a March 24 interview. "It takes very little to push a company over the edge."
Many businesses are managing just fine with heavy debt loads, said Jonathan M. Ball of Birmingham, Mich.-based turnaround specialist Conway MacKenzie & Dunleavy. But others face intense pressure that could push them into a crisis with very little warning.
"They're more susceptible to a hiccup — any hiccup," he said. "Some companies have done very well because they haven't had that hiccup."
Key is not alone. Air-bag specialist Breed Technologies Inc.'s U.S. division went into Chapter 11 in September. Cambridge Industries Inc. has put itself up for sale to cope with heavy debt and the high cost of preparing for new business. Meanwhile, corporate raider Carl Icahn recently spent $63.7 million to buy a 5.2 percent share in Federal-Mogul Corp., raising both its asking price for shares and concerns about its collective future.
Representatives for most of the companies either declined to speak about their current situations or did not respond.
But David C. Benoit, chief executive officer of Novi, Mich.-based Key Plastics, said that company remains viable and can survive once it restructures.
"[Key has] a great history and has done a lot of great things and will continue to do great business once we get everything in order," he said. "The fundamental business is fine. It continues to support its business base, its customers and its employees."
The firm is in the process of getting its finances in order, he said.
The need to expand and consolidate — pushed by automakers eager to work with global suppliers and Wall Street analysts looking for a big boost in sales numbers — has led to companies with extensive debt that must rely on continued growth to survive, consultants said.
Even industry insiders see the potential for failure.
"Quite frankly, I'm not overly surprised, because if you stop and look at some of the acquisitions that have been made, they're more defensive than offensive," said Thomas Evans, chairman and chief executive officer of injection molder Collins & Aikman Corp.
Business owners are not making decisions based on the long-term benefits of a deal, he said.
"People are saying that they can't afford to let their competitor get this, even though [they] don't need it right now," Evans said. "It gets all backed up, particularly in the plastics industry where a lot of people are having problems [when they acquire] just for the sake of getting bigger."
Meanwhile, investment capital is getting harder to come by, because brick-and-mortar businesses are out of investors' favor.
"The analysts reward growth," Evans said. "The dot-com companies and high-tech are so attractive, that it takes five times as much to impress an analyst than it did five years ago."
Times are good in the auto industry, with North American automakers turning out more than 16 million cars each of the past two years and just missing that mark in 1997. Sales are flirting with record pace this year.
But there is no guarantee that pace will continue, according to Mengel.
"A lot of our clients, the growth patterns they're predicting would exceed the gross national product," he said.
About half of the acquisitions make good business sense, said Scott Upham, president of Providata Automotive, an Ann Arbor, Mich.-based consulting firm.
"When I talk to people, everything's under a `best case' scenario," he said. "They're looking at broader product portfolios, but a lot of that is just wishful thinking. It's a simplistic, optimistic view of the industry.
"We're in good times now. Imagine the downturn to come."
Those businesses now under scrutiny have had a different problem crop up, but each one points to the overall concerns facing the industry, he said.
Breed Technologies Inc., based in Lakeland, Fla., launched an acquisition program to piece together a global network of integrated vehicle safety products. The world's third-largest air-bag manufacturer, Breed uses plastics extensively in bags and thermoplastic covers.
Breed's acquisitions included makers of steering wheels, seat belts and sensors. The idea was to supply complete safety modules to automakers.
Among those purchases was a 1996 $125 million buyout of Gallino Plasturgia srl of Turin, Italy, the third-largest European maker of steering wheels. On top of that, in 1997 Breed paid $711 million for AlliedSignal Inc.'s seat-belt division.
In 1998, Breed posted $1.38 billion in total sales and had 16,000 employees in 42 facilities worldwide.
But in September 1999, the company's domestic units entered Chapter 11 in a voluntary petition, with total debt of $1.6 billion. The company had posted a loss of $234.7 million through the first three quarters ending March 31, 1999.
Chairwoman Johnnie Cordell Breed, who took control of the business from her husband, Allen Breed, after he died of cancer in 1999, has placed the blame on former AlliedSignal executives, blaming them for overstating the value of the division.
She is now joined in a bid to buy Breed out of bankruptcy with Ernie Green, chairman and chief executive officer of EGI Inc., whose Dayton, Ohio-based business turned out $125 million worth of suspension assemblies and components last year, including plastic air-bag covers.
If their bid wins, it would make the new Breed the largest minority-controlled business enterprise, with Green, who is black, holding 50.1 percent of the business.
Ball, who has studied the operation on behalf of its customers, noted that Johnnie Breed has an uphill battle convincing the board she should continue with the business.
Breed's problems are a "textbook case" of poor acquisition strategy, he said. Breed bought companies with divisions that it did not need, did not know what to do with and spent too much while focusing on growth rather than results.
"With Breed, to a certain extent, there was a kind of ego thing as well," Ball said.
"AlliedSignal was a big pill to swallow," Providata's Upham added. "They are still processing that acquisition. What they inherited were a number of contracts that were bid below cost."
Experienced seat-belt makers at the time knew how to play an extensive game with automakers that would bring up the value of the contract through special engineering fees, he said. Breed did not know the rules.
"With the contracts bid so low, and Breed being a new company in the seat-belt business, they didn't know how to ratchet up the prices," he said. "It was a good acquisition, it was just handled poorly."
Upham also pointed to problems with Breed's purchase of Gallino. The Italian firm makes a variety of interior and exterior parts, including bumpers, he said. Breed did not need the bumper business, but it took until May 1999 — more than two years after the purchase — to divest it to Textron Automotive Co. Inc.
Compare that to Lear Corp., which went through its own massive acquisition recently, with the 1999 purchase of United Technologies Automotive from United Technologies Corp. for $2.3 billion.
While some analysts complain the merger was too expensive, it did allow Lear to position itself as a complete interior integration company.
The deal included divisions that Lear did not need. Unlike Breed, which took years to handle those systems, Lear had a deal in hand in just days, Upham said.
It closed the UTA buyout on May 4. On May 7, it had a preliminary deal to sell UTA's Electric Motor Systems business to Johnson Electric Holdings Ltd. for $310 million.
Like Breed, Key followed an extensive acquisition path, aiming to build itself into a global custom injection molding leader. In five years, it grew from nine facilities in the United States and Mexico to 34 facilities in nine countries.
Key now is the 11th largest injection molder in Plastics News' 2000 ranking.
Its biggest purchase came in 1999, when it paid $113 million in cash, debt and common shares to buy automotive molder Foggini Group, based in Turin, Italy.
But even before those acquisitions the global industry was changing, with automakers asking Tier 1 suppliers to produce integrated modules, rather than individual components, Upham said.
Key's status was changing: It was becoming a Tier 2 supplier, molding parts for Tier 1 companies that Key used to compete against, he said. That requires a different mind-set, one that is prepared to handle pricing demands from both automakers and Tier 1 firms, as well as cost fluctuations from raw materials.
"It's a well-managed company, but the problem is they grew too fast, too far, and they needed to come to the realization that they were going to be a subsupplier," Upham said. "When you go through a merger and acquisition phase, it takes a long time to integrate those companies, those customers, those employees. It takes years.
"Think of it like a snake. When a boa constrictor eats something, you can see it going through the snake. They never took time to digest it before they ate something else."
Ball added: "There's a strategy involved in going from a Tier 1 to a Tier 2. You've got to have a strategy."
Key listed more than $353 million in debt when it filed for Chapter 11 on March 23. It posted an estimated $550 million in total sales last year.
While Cambridge Industries has avoided the extent of financial troubles of Key and Breed, it had to put itself on the market this year — seeking buyers for either the entire business or a division.
The company posted $487 million in sales in 1998, but $16 million in net losses through the first nine months of 1999.
Cambridge hit its roadblock when financial backer Bain Capital Inc. announced it no longer would pour additional funds into the company, Ball said.
At the same time, Cambridge had major projects coming up with automakers, investing $10 million in a three-month period alone to ramp up for future production on parts such as plastic pickup-truck boxes.
That left Cambridge too strapped for cash to continue on its own, Upham noted.
"It's millions and millions of dollars [to do business] and you've got to have a white knight willing to ride in with the funding," he said.
Cambridge has narrowed its suitors down to a short list and anticipates completing a deal during the second quarter of this year.
In the meantime, its customers — including the North American Big Three and commercial truck makers — have altered their payment plan to help Cambridge out in the short term and ensure it can continue to do business.
Publicly traded companies have their own set of concerns, answering not only to the demands of the industry, but also to Wall Street investors.
Federal-Mogul Corp. of Southfield, Mich., ranks among the largest auto suppliers, with $2.4 billion in annual sales to the industry. Its headlights, with plastic covers and lenses, are part of a $700 million lighting, wiper blade and fuel systems division.
Its stock hit an all-time high of more than $70 a share in July 1998, in the midst of taking a $6 billion acquisition path. Through last spring and summer, its stock hovered around the $50 mark, when Breed suffered through a slump in aftermarket sales.
The company attempted to divest its lighting, wiper blade and fuel systems operations last year, but in February backed off, saying that retaining them was in stockholders' best interest and the company was not "able to realize full value for these investments."
In 1999, operating earnings hit $4.08 per share, shattering the 1998 earnings of $2.69 per share. But analysts had predicted earnings of $4.70 per share, and the lower-than-expected return hit share prices hard. By March 28, the stock price was at $12.18.
The same day, corporate raider Icahn announced that two businesses he controls, Riverdale LLC and High River LP, had bought nearly 3.7 million shares of Federal-Mogul for "investment purchases."
In a Securities and Exchange Commission report, the financier's representatives stated the businesses "may, at any time and from time to time, determine to seek the contact issuer regarding means of increasing stockholder value."
The big question is whether Icahn's interest will spur an improvement in the stock's value or if shareholders will decide the firm is worth more broken up into its individual pieces, Mengel said.
Icahn's purchases have sparked an increased interest in Federal-Mogul, pushing its share price up to about $16 early this month.
Some public companies are buying back shares to try to shore up prices. For example, Lear's board of directors recently approved a program to buy up to 6.7 million shares over 24 months.
Lear's stock was trading at about $25 at the start of April — half the value it was in May when it completed the purchase of UTA.
The move was also part of a strategy designed to discourage a hostile takeover. Lear announced its plan would "encourage anyone seeking to acquire the company to negotiate with the board prior to attempting a takeover."
Evans said Icahn's interest in auto suppliers is having an impact.
"You're going to see more of the big turnaround investment houses picking up positions in companies that are undervalued, because they know if they're patient over time, the value will be there," he said.
That is not to say that everything is bleak in automotive plastics, Mengel said. There are many opportunities, and companies that are run well can ride in the wake of automakers that are racking up record profits.
But executives must think clearly and fully understand not only what they need, but also what they can afford.
"Not everyone is meant to grow," he said. "You've got to take stock and ask yourselves if you can risk it."
Evans said businesses need to consider four key points before launching an acquisition:
Will it bring new technology to my company?
Will it help cut costs?
What new offering will this purchase give my customers?
Will this create excitement for my firm in the marketplace?
"You've got to be very careful, very strategic," he said. "I don't think the pressures [to grow] are unbearable, you just have to stand your ground."
Collins & Aikman launched a restructuring plan last year to improve its bottom line, dropping its total debt by $40 million to $916 million.
"We know there will come a softening in the volumes," Evans said. "When the market does soften, we're not going to be in too big of a problem."
Businesses that will continue to thrive must have a hook, Ball said.
"You've got to have some kind of a differentiator, something that sets you apart, a proprietary process.
"You can't just say you have the best price and performance. Being a low-price producer is a terrible strategy, because someone down the road is always going to be able to undercut you, and then where are you?"
Rather than buying another firm outright, small and midsize producers may want to consider strategic alliances that allow businesses to offer a combined product that benefits both players, he said.
"You need strategic thinking from companies that are not relying on Wall Street and Wall Street's hunger for deals," Upham said. "Advisers are telling you that you need to be global, that you need to take on all this debt to compete.
"They're lining their own pockets when they're doing this. They're not looking at the [company's] functionality within the auto industry."