ZF offers to buy TRW Automotive

ZF Friedrichshafen has offered to buy TRW Automotive, according to a press release by the German car driveline and chassis specialist. "ZF has confirmed that it is in the preliminary stage of discussing a possible acquisition for American automotive supplier TRW. There can be no assurance that any transaction will be agreed." ZF further added in the press statement that it "does not intend to make any further public comment on this matter until a definitive agreement with TRW is reached or discussions are terminated." At the same time TRW has confirmed that it has received a preliminary, non-binding offer from ZF. The US-based safety system specialist said it is considering the proposal. "The company is evaluating the proposal as well as other strategic alternatives which may enhance stockholder value." However, TRW stressed that it has "not taken a call to pursue any specific strategic transaction or any other strategic alternative," adding that there is no set timetable for the strategic review process. "There can be no assurance that the process above will result in the consummation of any transaction or any changes to the company's current business plan," TRW said in a press release. The US-based safety systems supplier has retained Goldman Sachs as its financial adviser.

According to a Bloomberg report, TRW has allowed ZF to begin initial due diligence research, and ZF values TRW at about USD11–12 billion – although the report also says that no specific price has been discussed. Based on trading at 1pm 10 July, TRW shares were trading at USD100.03, giving it a market capitalisation of USD11.1 billion.

ZF's offer to acquire TRW is the largest by a supplier to buy another since Schaeffler made its controversial, leveraged buy-out of Continental in 2008 for EUR12 billion (USD16.3 billion). The latest offer, if materialises, would catapult ZF and TRW combined into the top three global suppliers. ZF reported sales of EUR16.8 billion in 2013, of which about 88% (EUR14.8 billion) came from the automotive market. TRW, on the other hand, reported sales of USD17.4 billion in 2013, all of which came from automotive industry. TRW and ZF combined would have total sales of USD40.6 billion, of which about USD37.8 billion would come from the automotive business. In term of sales to the automotive industry, ZF and TRW combined will be third global supplier, behind Bosch and Denso but ahead of Continental. Bosch's Automotive Technology division, which caters to automotive industry, reported sales of EUR30.5 billion in 2013 while Denso generated JPY4.03 trillion (USD39.2 billion), equivalent to 98.4% of the total JPY4.1 trillion in FY 2013/14 from automotive business. Continental generated 28% of EUR33.3 billion, equivalent to EUR23.9 billion from the automotive business.

The acquisition would create little overlap, given that the two companies focus on different product lines. ZF's product lines include components and systems for chassis, suspension, transmission and steering and electronics whereas TRW focuses primarily on braking systems, driver assist systems, steering systems, suspensions, occupant safety systems and electronics among others. TRW is betting on high growth potential in advanced drive assist systems (ADAS) projecting that the market will grow by more fivefold through 2020. Both companies, in the past few years, has benefited from strong recovery in the vehicle sales in North America. In 2013, TRW generated 34% of sales from the US market, while for ZF North America was the second biggest market after Europe contributing 18.4% of sales. The German supplier continues to rely heavily on the European market for growth generating 58.4% of sales from the region. Although vehicle demand has been recovering in the Europe for past few months the overall market remains fragile. In contrast, vehicle demand is projected to remain robust in North America for the rest of this decade. The combine of ZF and TRW will be better positioned to deal with demand fluctuation in these two key markets. Meanwhile, both ZF and TRW continue to focus on international business expansion, with special focus on emerging markets in Brazil, China, India and eastern Europe. In 2013, TRW had manufacturing presence in 24 countries and employed 65,000. ZF, on the other hand, operated with 122 production companies in 26 countries employing 72,600 people.

Outlook and implications

It is too soon to know if this deal will come to fruition, but it appears the two companies have complementary automotive product lines. The purchase could allow ZF to add technology for occupant safety and crash avoidance to its mechanical products, creating a competitive entity with global coverage in automotive technology fields which are set to see significant over the coming decades. Given the drive toward electric assistance for driving systems and self-driving cars widely presumed to be the next stage in automotive development, the combination of each company's expertise could make for a powerful automotive supplier to serve the demands of changing industry trends. The acquisition of TRW would enable ZF to generate growth from the acquisition itself, but also enable new synergies and system and product development neither company is likely to be able to do on its own. However, ZF's 2013 turnover was actually smaller than TRW's and the company must ensure that it does not overstretch itself in making the acquisition, Schaeffler's highly controversial and highly leveraged takeover of Continental in 2008 occurred just before the global downturn, leading to both entities becoming dangerously overstretched at times during this period, with Continental also servicing high debt payments as a result of its own acquisition of Siemens-VDO. However, as long as the markets and shareholders are receptive of the deal any new entity has the potential to be a supplier of sophisticated systems and components that will help aid the automotive industries shift to increased automation and electrification.