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Last Updated: 4/26/2000 6:01:00 AM
The Merger

Analysts, Wall Street: Meritor benefits from Arvin merger
By Sabine Vollmer

Analysts consider the merger of Arvin Industries Inc. and Meritor Automotive as a good deal for Meritor.

Wall Street agreed.

At the end of the trading day Thursday, Meritor’s stock sold for about 25 cents per share more than the previous day. Arvin stock lost almost $1 per share.

That’s unusual, said Raghavendra Rau, assistant professor of finance at Purdue University’s Krannert School of Management.

Usually, the company being bought is doing well, Rau said.

After the stock swap, Arvin shareholders will own about 34.2 percent of the merged company, to be called ArvinMeritor. Meritor shareholders will own 65.8 percent.

In a report to Hilliard Lyons of Columbus, an analyst with Warburg Dillon Reed said the merger reduces Meritor’s debt and buffers the company against the effects of the cyclical heavy-duty truck market.

An analyst with Fahnestock and Co., another broker commenting on the merger, applauded the deal, said Bob DeDomenic of Hilliard Lyons.

Combining forces will allow the companies to piggyback on each other’s expertise, according to Fahnestock.

That means Arvin shareholders may see the benefits of the merger in two to three years.

Merrill Lynch & Co. estimated ArvinMeritor’s earnings per share at $4.75 in 2001.

Analysts’ estimates before the merger were 2001 earnings per share of $4.36 for Arvin and $3.46 for Meritor.

V. William Hunt, Arvin chairman and chief executive officer, and Larry Yost, Meritor chairman and CEO, estimated the merger will save about $100 million in the next three years. Management expenses, for example, would be trimmed about $20 million.

The merger will allow Arvin to enter the heavy-duty exhaust market, Hunt said.

Columbus-based Arvin supplies exhaust and ride-control systems to automakers and some shock absorber products to the heavy-duty truck market.

The company tried to enter the heavy-duty truck market with the help of Cummins Engine Co., the Columbus-based diesel engine manufacturer. But in December 1998, Cummins bought Nelson Industries for heavy-duty truck exhaust systems.

Troy, Mich.-based Meritor is the world’s largest manufacturer of heavy-duty truck axles. The company also supplies drivetrain systems, roofs and other components for heavy- and medium-duty vehicles.

Research he has done based on more than 3,000 mergers, Rau said, concludes that Arvin and Meritor will perform better in three to five years.

“It looks encouraging, unless this is the exception to the rule,” he said.

The method of payment in the merger is one good sign for Arvin shareholders, Rau added.

Under the merger agreement, Arvin shareholders will receive one share of ArvinMeritor for each Arvin share and $2 in cash per share.

That indicates Meritor considers Arvin stock as undervalued, Rau said.

Wall Street has been ignoring the auto parts industry, according to Warburg Dillon Reed.

Companies such as Arvin and Meritor have improved performance, but their stock has traded at lackluster prices. In the past year, both companies’ stock value dropped by about 40 percent.

The Warburg Dillon Reed analyst expected more auto parts manufacturers to either merge or become privately owned as a result of Wall Street’s disinterest in the industry, DeDomenic said.

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