A Swedish Tiger In Ford's Tank

By bagging Volvo, the No. 2 carmaker inches closer to GM

Last October, Ford Motor Co. learned a lesson: Even in a global auto business glutted with excess capacity, you can't get assets on the cheap. Ford found that out when it made a low-ball bid to snag Korean auto maker Kia Motors Corp. and lost it to Hyundai.

Three months later, the world's No. 2 auto maker is walking away with a prize, the car business of Sweden's Volvo, by paying $6 billion dollars--billions more than it originally hoped. But Volvo is considered one of the choicest targets in the industry. And the deal, which was expected to be announced on Jan. 28, would help Ford pursue three goals: boost market share, fill a hole in its lineup, and give it a little more momentum in its drive to unseat General Motors Corp. from the No. 1 slot.

BARELY A DENT. After buying Volvo, Ford would have worldwide sales of 7.2 million--a scant 300,000 behind global leader GM and miles ahead of Toyota Motor Corp. and Volkswagen. Ford felt the deal was essential, given the ever-increasing pace of industry consolidation.

And with $24 billion in cash barely dented by the Volvo deal, Ford may not be finished buying. Even as they were eyeing Volvo, Ford executives were considering combinations with either BMW or Honda Motor Co.--neither of which are likely to march down the aisle willingly. "We intend to be the best auto company in the world, and we haven't ruled out being the biggest, either," Ford Vice-Chairman Peter J. Pestillo declared last September when Chairman William C. Ford Jr. and CEO Jacques A. Nasser took over.

With Volvo, however, Ford would gain much more than just size. In the U.S., Ford officials admit the company's luxury car sales are weak in Northeastern states, where Volvo does much of its business. In Europe, Ford repeatedly has failed to take its brand upscale. While Jaguar has always aimed at the top of the market, it is now trying to capture an even broader affluent following with its new $45,000 S-type. But Ford hasn't competed effectively in the $30,000-to-$40,000 price range, where Volvo is strong. "Volvo is a nice fit for Ford because it fills a niche," says Wendy B. Needham, auto analyst with Donaldson Lufkin & Jenrette Securities Corp. in New York.

If Volvo's independent-minded shareholders approve the Ford deal, it would be the first transatlantic auto acquisition since Daimler-Benz took over Chrysler Corp. for $35 billion in November. That deal set auto executives on a tear, convinced that the technology-intense, high-cost industry would collapse as nearly 40 companies scrambled for market share. The alternative is a massive consolidation that, industry execs predict, will reduce the industry to six major players by 2010. Even now, the new DaimlerChrysler is in talks with Nissan, Japan's troubled No. 2 auto maker. In a business where a new model can cost $3 billion to develop from scratch, "any company producing less than 1 million units a year won't survive in a robust fashion," says Ford's Nasser.

Casting its car future with Ford also would give Volvo a chance to reinvent itself. It is expected to retain its profitable heavy truck division, which it hopes to try to align with Swedish truckmaker Scania. According to sources close to the deal, Volvo passed up a pact with Fiat, even though the Italian carmaker was believed to be willing to pay as much as $7 billion. The hitch was that Fiat also wanted Volvo's truck business, which Volvo didn't want to sell.

HOT WHEELS. Volvo recognized that it could no longer go it alone in cars, even though its revamped lineup is faring well. The Swedish auto maker, known for its boxy but safe cars, has begun to discover the joys of attractive automotive design. Volvo's U.S. sales jumped 11.3% last year, to 101,172 cars, thanks in part to the sleekly styled C70 coupe. It now sells a convertible, too. And Volvo is getting raves for its elegantly styled S80 sedan, which starts at $36,395, well below competing models from BMW and Mercedes-Benz.

A Swedish Tiger in Ford's Tank

Hot new models like those have landed Volvo on an accelerating growth curve. The auto maker expects worldwide sales to reach 500,000 by 2002, with healthy profit margins of 5% to 8%, says Hans-Olov Olsson, Volvo's U.S. chief. In the U.S., Volvo expects sales to surge past 200,000 cars after 2000. "We believe we have a strong growth strategy in the U.S.," says Olsson.

So does Ford CEO Nasser. And, if another acquisition comes his way, his pocketbook is open. "At the right price, we're always prepared to sit down and talk with anyone," he said recently. Today Volvo, tomorrow...

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