GM and Allison Transmission and Deals and Manufacturing & Technology

Allison Transmission might be ripe for management buyout

February 19, 2007

As struggling General Motors Corp. tries to raise cash by unloading Allison Transmission, the fate of the city's third-largest manufacturer hangs in the balance.

But there's no deathwatch at the venerable Speedway plant. Analysts say its market dominance and strong management team--coupled with an abundance of private equity--could spare it the fate of other auto plants here that are waiting to be closed or have already been sold for scrap.

"I think there is a real possibility that the employees could leverage this," said Kevin Tynan, an automotive industry analyst for Argus Research Corp. in New York. "There's private equity out there for this, and I think the organization [within Allison] is in place."

Allison--one of GM's few profitable divisions--is expected to command a salty price, perhaps $800 million, making outside money crucial.

"I can't imagine the management team would have near the resources to do this," said Bob Shortle, a principal with Periculum Capital Partners in Indianapolis. "They'd need a strong equity partner."

Allison's ultimate future will be determined by what type of buyer emerges, Shortle said.

A financial buyer, one looking at Allison as a long-term investment, would be more likely to invest in and grow the operation, Shortle said. A strategic buyer, especially one within the auto industry, is more likely to look for synergies and cut jobs.

Last summer, GM officials began studying Allison's financials, and last month, they announced the transmission maker was on the block.

GM said the sale would allow the Detroit automaker to focus on its core business of manufacturing passenger vehicles and light trucks. A sale would also raise plenty of cash for GM, which lost more than $10 billion in 2005, and is expected to announce losses of $4 billion to $6 billion for 2006.

"GM is desperate for cash, and confused," said Phil Powell, chairman of the evening MBA program at IUPUI. "Allison is highly profitable and an attractive property."

Allison has $2 billion in annual sales with a steady profit margin, industry analysts said. With 3,400 employees, it follows only drugmaker Eli Lilly and Co. and jet engine manufacturer Rolls-Royce Plc. in size of Indianapolis manufacturing operations. Its annual payroll is $230 million-plus, and its $27-plus hourly pay rate is one of the highest in Indiana, local economists said.

Closing Allison would be a major blow to the local economy, but political leaders are confident it will survive.

"We've definitely communicated with [Allison and GM officials]," said Indianapolis Mayor Bart Peterson. "The word is, everybody believes the plant is profitable, it's successful, it's not outdated, it doesn't have some of the problems other plants have had. The belief is, [GM] is selling it just to get cash.

"The belief within the company is ... it will continue to be operated with minimal loss of jobs."

Allison Transmission, which was founded in 1913 as Allison Speedway Team, designs, engineers, manufactures and sells transmissions for commercial and military vehicles. Allison sells its products, parts and support through a worldwide distribution network and sales offices throughout North America, South America, Europe, Africa and Asia. It maintains an 80-percent share of the market for medium and heavy-duty commercial automatic transmissions.

GM bought Allison for $592,000 in 1929 after the death of its founder, James A. Allison. It operated as a stand-alone division of GM until 2002, at which time it was absorbed into GM's Powertrain Division.

For sale, take two

This isn't GM's first attempt to unload Allison, which maintains a sprawling seven-building campus on West 10th Street near Holt Road.

In 1993, GM tried to sell it to German supplier ZF Friedrichshafen AG for $525 million, but the deal unraveled after U.S. antitrust regulators sued to block the sale.

Since GM hinted at another sale attempt last summer, Friedrichshafen and Cleveland-based Eaton Corp. have emerged as potential suitors, but antitrust issues could crop up again.

New York investor Wilbur L. Ross Jr. has also expressed interest in buying Allison, but analysts said he'd likely try to get it for far below market value, a tactic GM would surely reject. Ross is known for restructuring failed companies in industries such as steel, coal, telecommunications and textiles.

Analysts said any suitor would likely eschew buying a minority stake or partnering with GM to run Allison, preferring instead for an outright buyout. Allison could easily fetch more than $800 million, analysts said.

"I think Allison would be a bargain for $800 million," said Dennis Virag, president of The Automotive Consulting Group Inc., a Michigan-based automotive management-consulting firm.

Virag thinks Allison will become even more profitable just by divorcing itself from GM.

"I can tell you for a fact, there is significant interest in this from investment houses," Virag said. "Just take out what goes to GM, and you can realize significant savings. That goes right to the bottom line. Savvy investors can see that."

Allison IPO?

If Allison employees are considering a buyout, Virag said they shouldn't have a problem finding an equity partner. He predicted any buyers of Allison would eventually take the company public to raise capital to grow the operation.

"That's what happened to American Axel, and Allison is in a much better position than American Axel," Virag said.

Michigan-based American Axel & Manufacturing was spun off from GM in 1994, and went public in 1999. American Axel has since registered annual sales near $4 billion, with profits nearing $200 million.

IUPUI's Powell thinks a smart investor will be eager to retain Allison's highly trained workers.

"Could a sale cost a few hundred jobs? Maybe," Powell said. "But I don't expect it to cause a huge dislocation of workers. Its people are part of Allison's strength. Allison has a strong management team and a cadre of highly skilled engineers."

Other local automotive plants have had difficulty finding buyers, largely because the plants themselves or their workers hadn't kept up with new technology.

Ford Motor Co. failed to sell its 2,000-worker east-side plant after announcing the steering components manufacturing facility would need tens of millions of dollars in employee retraining and facilities upgrades to remain competitive. Last month, Ford announced it would close the plant in 2008, displacing 1,500 workers.

DaimlerChrysler closed its Indianapolis foundry in September 2005, idling 900 workers. The engine block plant has since been dismantled and the site cleared.

"Allison isn't some dinosaur out there," said David Cole, chairman for the Center for Automotive Research, a Michigan-based industry think tank. "It may need some tweaks, but it's an excellent company."

If Allison is keeping up with ever-changing federal emissions standards, that will increase its appeal, Cole said. "That issue is very important in this industry, especially when it comes to diesel engines."

Binding ties

Cole said the biggest challenge in selling Allison could be its GM ties.

"The legacy of GM brings down the value," he said. "They have a history of difficulty with labor, liability and a litany of other issues."

Fortunately, Cole said, Allison has maintained a sense of autonomy over the years.

"Allison has largely remained outside the poisonous culture of Detroit," he said.

And despite GM's difficulties, analysts said, Allison President Lawrence E. Dewey and his management team have retained a strong reputation.

Dewey and GM officials declined to comment for this story.

"Growing companies and capital investors are always leery of the existing culture and melding that into another operation," said Charlene Sullivan, associate professor of management at Purdue University's Krannert School of Business. "Changing the culture of a company can at times be more expensive than the purchase price itself."

But Cole said Allison's reputation for innovation will overshadow its ties to GM.

"I think Allison's continued product developments demonstrate it's still a player in this industry and has room for growth," Cole said. "I don't think it's an issue of Allison's potential; I think it's a matter of finding an investor that can leverage the value of this operation."

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