Maybe What's Good For Gm Is Good For Ford

It hopes that a spun-off Visteon will be as successful as Delphi

Cyclical auto stocks are hardly the rage right now, but Ford Motor Co.'s proposal to spin off its $19 billion Visteon parts unit certainly has Wall Street buzzing. Ford's directors were expected to announce a decision as early as Apr. 14. Anticipation of the spin-off drove the carmaker's stock up 5 1/2 points over several days, to more than 53 by Apr. 12.

Ford's board may continue to debate the structure of any spin-off. But the deal is widely expected to happen sooner rather than later--largely because it makes so much sense. With Visteon Automotive Systems as an independent company, both Ford and its offspring would stand to profit mightily.

For Ford, the biggest benefit would be the ability to get the best technology at the best prices by shopping around at other parts suppliers. Moreover, the No. 2 auto maker wouldn't have the fixed costs of running Visteon's 125 parts facilities worldwide.

Visteon, too, would surely be better off on its own. Now, says Ford, rival carmakers are reluctant to buy parts from Visteon because they fear that trade secrets would end up being shared with its parent company. Cut loose from Ford, Visteon could better compete for new business from other automotive manufacturers.

That has certainly been the experience of Delphi Automotive Systems Corp., the parts maker spun off last year from General Motors Corp. GM spun off its $29 billion parts unit in a two-part transaction, and by most accounts, the deal turned out better than expected: Delphi's sales to non-GM auto makers have risen from 18.3% of total revenues in 1997 to 28% in the first three months of this year. Delphi hasn't lost any GM business either, even though its former parent sought bids from other suppliers. Why? A booming market for cars and trucks made room for everyone.

Visteon hopes for similar success once it's freed from Ford. But the company has a long way to go to meet its goal of increasing non-Ford business to 20% of sales by 2002, from a mere 11% now. "Visteon is as dependent as one gets," says Darren S. Kimball, an auto-parts analyst at Lehman Brothers.

It is also much less seasoned than Delphi was when it achieved emancipation. Delphi was formed in 1992 as GM's Automotive Components Group. CEO J.T. Battenberg spent the next seven years shedding unprofitable businesses and boosting efficiency to prepare for independence. Visteon, on the other hand, was formed in 1997. But Kimball notes that, unlike GM, which was in the doldrums for much of the early 1990s, Ford's business--and Visteon's--has been growing. "They don't need to be in the incubator as long," he says.

LABOR PAYOUT. For Visteon to succeed as a stand-alone company, however, it must become more price-competitive. That's no easy matter given its high labor costs. With the United Auto Workers threatening a Ford strike last fall over the spin-off issue, the auto maker guaranteed that it would protect the Ford-level wages and benefits of all current Visteon employees as well as those hired by Visteon over the next decade or so. Up-front payments associated with the labor contract knocked $103 million, or 8 cents a share, off Ford's fourth-quarter earnings last year. "It was a huge price they had to pay, but that was the entry fee for the right strategic move, which is a spin-off," says analyst Rod Lache of Deutsche Banc Alex. Brown.

Still, Delphi's experience indicates that Visteon's growth prospects will improve simply by setting it free. "The mere independence of Visteon creates the upside," says analyst Scott F. Merlis of Wasserstein Perella Securities. And Visteon will no doubt be on the prowl for acquisitions, too.

Ford says the spin-off will likely occur sometime in the third quarter. "Ready or not, here they come," says Lache. Given the success of Delphi, it's no wonder Ford is eager to move.