Bmw: Unloading Rover May Not Win The Race

It needs to expand its model range--and it may be buyout bait

Investors have driven up BMW's stock nearly 30% since word got out that the Bavarian luxury carmaker would stop nursing "The English Patient," as its ailing Rover subsidiary was nicknamed. After having spent $4.4 billion over six years in a failed turnaround attempt, BMW announced in mid-March that most of Rover's car business would be sold to Alchemy Partners, a British venture-capital firm, while its Land Rover line would go to Ford Motor Co. That finally frees BMW to concentrate its money and engineers where the auto maker has traditionally seen its biggest payoff: its luxury-car business.

JEALOUS RIVALS. Trouble is, that also leaves BMW with the same problem that drove it to buy Rover in the first place: how to expand its model range. Besides its luxury cars, priced from $18,250 to $91,000, BMW owns only the rights to the prestigious Rolls-Royce name and Rover's famous Mini brand, which it did not sell. Chairman Joachim Milberg plans to develop an entry-level BMW in the midprice segment dominated in Europe by Volkswagen's popular Golf, which is priced at $14,000. He intends to offer premium vehicles in each segment in which BMW competes--minicars, midsize cars, luxury sedans, and sport-utility vehicles. "We're in no way diluting our strategy," he says. But he may not have a lot of time. It's getting increasingly difficult for a modest-size auto maker to stay independent. Indeed, BMW's stock price is up at least partly because some investors see the cleaned-up company as even more attractive takeover bait.

It could take three years to develop the entry-level BMW, but the company needs to reach a wider audience. "VW allows consumers to move upmarket within the group, and BMW needs to do that, too," says analyst Sabine Blumel at Banca IMI in London. Unencumbered by Rover, BMW will have $800 million to $1 billion more a year to spend on new models, including a sporty new Mini it will launch next year. But it must also defend its position at the top end of the market, where its rivals are moving in. "They're all targeting BMW niches," says Merrill Lynch & Co. analyst Stephen Reitman. "Take the IX200 and IX300 by Lexus. It looks like they worked off the DNA of the BMW 3 series."

For now, at least, it looks as though BMW will stay independent. Its profit margins are the envy of the industry, probably second only to those of Porsche. And the secretive Quandt family, which holds a 47% stake in BMW, seems unwilling to sell. "The enthusiasm for BMW lives on in the fourth-generation of the Quandts," says a family spokesman. But there's no shortage of potential suitors, including Volkswagen, GM, and Ford. Ford is now building a stable of luxury brands run by former BMW executive Wolfgang Reitzle.

Yet the acrimonious breakup of BMW-Rover is a reminder of how hard it is to make an acquisition pay off. The British government lashed out at BMW for dumping Rover without warning, and British unions urged a boycott of BMW cars. At a tense news conference at BMW's Munich headquarters, Milberg conceded that the company should have tackled Rover's problems sooner, although he said that the brand's weakness and the pound's strength had doomed their efforts. The lesson is not lost on other company bosses. "Mergers and acquisitions aren't necessarily the right answer to the challenges of globalization," says Jean-Martin Folz, the chairman of French family-controlled auto maker PSA Peugeot Citroen, which wants to remain independent.

How quickly and successfully BMW can develop a new Mini, a new Rolls, and a premium midsize car will be the test for Milberg. A 57-year-old former professor who joined BMW's board in 1993, he was catapulted into the top job last year after a boardroom fight over Rover's fate led to the resignations of Chairman Bernd Pischetsrieder, as well as Reitzle.

As part of the Rover upheaval, three members left BMW's board, including the directors responsible for sales and production. That suggested the Quandts want results. Another strategic misstep by BMW, and the fourth-generation Quandts may yet redo their portfolio.