Timken torrington acquisition case

UVA-F-1472 Rev. Aug. 28, 2008

This case was written by Professor Kenneth Eades and Ali Erarac (MBA ’04). It was prepared as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright © 2005 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 8/08. ◊

THE TIMKEN COMPANY

In 2002, The Timken Company was considering acquiring the Torrington Company from Ingersoll-Rand. The acquisition would make a clear statement to the market about Timken’s commitment to remain a worldwide leader in the bearing industry by combining more than 100 years of bearing manufacturing and development experience. Because the two companies shared many of the same customers but had few products in common, customers would surely appreciate that Timken’s sales representatives could meet more of their needs. Timken’s potential annual cost savings from consolidating manufacturing facilities and processes were estimated to be more than $80 million. If the price paid for Torrington were too high, Ingersoll- Rand, rather than Timken, would capture the value of the synergies. In addition, given the large size of the acquisition, Timken was concerned about the impact on its balance sheet. If Ingersoll- Rand demanded a cash deal and if Timken raised the money with new debt, the increased leverage would almost certainly prompt credit agencies to downgrade Timken’s investment- grade rating. The Bearing Industry

Bearings of various sizes and specifications found their way into everything from space shuttles to household appliances, automobiles, dentist drills, roller skates, and computer disk drives. In 2001, U.S. establishments involved in ball- and roller-bearing manufacturing employed more than 33,000 workers.

The bearing industry was facing a variety of complex problems. Policies favoring the steel industry did not always consider the best interests of the bearing industry, which, as manufacturers of secondary steel products, was in the middle of the production chain. Because bearings were essential components of military and civilian machinery and equipment, the federal government had historically been a major customer. Nonetheless, foreign competitors had taken business away from U.S. companies by selling bearings of equal quality at lower prices. The intensity of the competition at times resulted in charges by U.S. firms of illegal dumping practices by foreign competitors.. Found guilty of such practices, those companies

UVA-F-1472

-2-

often turned around and either opened or bought plants in the United States to supply their American customers.

Shipments of ball and roller bearings grew steadily during the 1990s, peaking in 1998 at

more than $5.8 billion. Although 1999 and 2000 remained relatively strong, the value of shipments dropped dramatically in 2001, sinking to $5.3 billion, the lowest since 1995. Reasons included the economic recession, decreased automotive demand, and the terrorist attacks on September 11, 2001. There had been moderate growth in the sector in 2002, led by automotive production, which had risen 5% due to sales incentives, including 0% financing. Overall, the bearings-industry demand was expected to soften as automotive demand had begun to decrease in late 2002 and was generally expected to remain flat for 2003. Thus, the bearings industry appeared to be in a cyclical trough from which many analysts predicted a more widespread recovery in 2003 of about 2% to 3% growth.

Bearings worldwide were doing significantly better. Orders had increased globally and

were forecast to grow 6.5% a year through 2005, to $42 billion. With supply levels remaining high worldwide, prices overall were stable and not expected to rise in 2003. Conversely, prices for imports were expected to increase in 2003. As bearings from China came into the United States, selling at below-market prices, the federal government had levied antidumping duties of up to 59.3%. Antidumping payments to Timken amounted to $50 million in 2002 ($30 million in 2001).

The major industry players included Timken, SKF, and NSK, Ltd. Sweden-based

Aktiebolegat SKF controlled 20% of the world market in bearings, which was more than twice the market share held by its closest competitors. In 2002, its sales were $4.8 billion, up 18.2% from 2001, and the company employed 39,000 workers. NSK, Ltd., based in Tokyo, produced bearings for the automotive, information technology, and electronics industries. In 2002, NSK’s sales reached $3.62 billion and employment topped 22,000, spread across 50 subsidiaries worldwide. In 2002, Timken reported a net income of $38.7 million on sales of $2.55 billion (Exhibit 1) and assets of $2.75 billion (Exhibit 2). Two-thirds of Timken’s sales came from bearings, and about 20% of its sales were from outside the United States. Timken had operations in 25 countries and employed nearly 18,000 workers. The Timken Company

In 1898, veteran St. Louis carriage-maker Henry Timken patented a design for tapered roller bearings (bearings enclosed between a pair of concentric rings) to facilitate the motion of carriage axles. The following year, Timken and his sons, William and Henry (H. H.), founded The Timken Roller Bearing Axle Company, which was the beginning of what was to become a global manufacturer of highly engineered bearings, alloy and specialty steel, and related components. In 1902, the company moved to Canton, Ohio, to be near the growing steelworks in Pittsburgh, Pennsylvania, and the new automobile factories in Buffalo, New York, Cleveland,

UVA-F-1472

-3-

Ohio, and Detroit, Michigan. In 1908, with the debut of the Ford Model T, the Timkens’ business soared. In 1917, the company began making its own steel for bearings.

Timken stock was sold to the public for the first time in 1922. World War II created

increased demand for Timken’s products, and the company opened several new plants. H. H. Timken’s son, W. Robert Timken, became president in 1960 and chair in 1968. The company continued to grow during the 1960s, when it opened plants in Brazil and France. In 1970, the company adopted its current name, the Timken Company. W. R. Timken Jr., grandson of the founder, became chair in 1975.

In 1982, with increasing competition from Europe and Japan, the company suffered its

first loss since the Depression. During the years that followed, Timken engaged in joint ventures, acquisitions, and investments in the United States as well as various locations around the world, including the United Kingdom, Europe, India, China, Africa, and Australia. In 1999, Timken cut production capacity to 80%, and began to consolidate operations and restructure into global business units. The company closed plants in Australia, restructured operations in South Africa (cutting about 1,700 jobs), and outsourced its European distribution to a company in France. In early 2001, the company announced that it would lay off more than 7% of its work force.

Timken business units

In 2002, the company operated three segments: the Automotive Group, the Industrial

Group, and the Steel Group. The Automotive and Industrial Groups designed, manufactured, and distributed a range of bearings and related products and services. Automotive Group customers included original-equipment manufacturers (OEMs) of passenger cars and trucks, ranging from light- and medium-duty to heavy-duty trucks and their suppliers. Industrial Group customers included both OEMs and distributors for agricultural, construction, mining, energy, mill, machine-tooling, aerospace, and rail applications. The Steel Group designed, manufactured, and distributed different alloys in both solid and tubular sections, as well as custom-made steel products, for both automotive and industrial applications, including bearings.

Automotive and Industrial Groups: The tapered roller bearing was Timken’s principal product in the antifriction industry segment. It consisted of four components: the cone, the cup, the cage, and the tapered rollers. The roller bearing contained many individual and highly toleranced components. When properly applied to a qualified axle journal, it became a system whose function was to carry the weight of the railcar and its cargo reliably, with minimal rolling resistance. The bearing stack comprised both load-carrying and non-load-carrying components. Certain components of the bearing were designed to carry the load. Those components safely carried the weight of the railcar and its cargo with a minimum of rolling resistance. The non- load-carrying components positioned the bearing laterally on the axle and provided the force necessary to achieve proper bearing clamp. Although they did not directly carry the weight of the railcar and its cargo, those components were critical to overall bearing performance. Sometimes called auxiliary components, they completed the bearing stack. Timken manufactured or purchased those components and then sold them in a variety of configurations and sizes.

UVA-F-1472

-4-

The company’s aerospace and superprecision facilities produced high-performance ball bearings and cylindrical bearings for ultra high-speed and ultra high-accuracy applications in the aerospace, medical and dental, computer disk drive, and other industries. Those bearings utilized ball- and straight-rolling elements and were in the superprecision end of the bearing industry. A majority of Timken’s aerospace and superprecision products were custom-designed bearings and spindle assemblies. They often involved specialized materials and coatings for use in applications that subjected the bearings to extreme speed and temperature.

The company competed with domestic manufacturers as well as foreign manufacturers of

antifriction bearings, including SKF, INA-Holding Schaeffler KG, NTN Corporation, Koyo Seiko Company, Ltd., and NSK, Ltd. Timken’s principal competitors in aerospace products included Ellwood Specialty, Slater/Atlas, and Patriot.

Steel Group: Steel products included steels of low and intermediate alloy, vacuum-

processed alloys, tool steel, and some carbon grades. Those products were available in a range of solid and tubular sections with a variety of lengths and finishes. They were used in an array of applications, including bearings, automotive transmissions, engine crankshafts, oil drilling, aerospace, and other similarly demanding applications. Approximately 13% of Timken’s steel production was devoted to its bearing operations.

Timken also produced custom-made steel products, including alloy and steel components

for automotive and industrial customers. That business provided the company with the opportunity to further expand its market for tubing and to capture higher value-added steel sales. It also enabled Timken’s traditional tubing customers in the automotive and bearing industries to take advantage of higher-performing components that cost less than alternative products. Custom-made products were a growing portion of the company’s steel business.

Timken’s worldwide competitors in seamless mechanical tubing included Copperweld,

Plymouth Tube, V & M Tube, Sanyo Special Steel, Ovako Steel, and Tenaris. Competitors in steel-bar products included such North American producers as Republic, Mac Steel, North Star Steel, and a variety of offshore steel producers that imported into North America. Competitors in the precision-steel market included Metaldyne, Linamar, and such overseas companies as Showa Seiko, SKF, and FormFlo. High-speed steel competitors in North America and Europe included Erasteel, Bohler, and Crucible. Tool-and-die steel competitors included Crucible, Carpenter Technologies, and Thyssen. Ingersoll-Rand

Ingersoll-Rand was an $8.9 billion global diversified manufacturer of industrial and commercial equipment and components. It traced its history to 1871, when Simon Ingersoll patented a steam-powered rock drill, a watershed event that led to the formation of the Ingersoll Rock Drill Company. In 1872, Albert Rand started Rand & Waring Drill and Compressor Company, and changed the name to Rand Drill Company in 1879. Later that year, the first Rand

UVA-F-1472

-5-

air compressor was introduced. In 1885, the Sergeant Drill Company was formed when Henry Sergeant left the Ingersoll Rock Drill Company. In 1888, the Ingersoll Rock Drill Company merged with the Sergeant Drill Company to form the Ingersoll-Sergeant Drill Company. In 1905, Ingersoll-Sergeant merged with Rand Drill to form Ingersoll-Rand, headquartered in New York City.

In the 1960s, the company completed nine acquisitions, including The Torrington

Company in 1968. In 1985, the Fafnir Bearing Division of Textron was purchased and merged with Torrington. Those acquisitions made Ingersoll-Rand (IR) the largest U.S. bearing manufacturer. Over the ensuing 20 years, IR continued in acquisition mode until, in 2002, the company consisted of four segments: Climate Control, Industrial Solutions, Infrastructure, and Security and Safety.

Climate Control segment This segment accounted for 25% of consolidated sales and 17% of income among all

segments (segment income). Climate Control produced transport temperature units and heating- ventilation and air-conditioning systems for trucks, buses, and passenger railcars.

Infrastructure segment This segment accounted for 27% of consolidated sales and 28% of segment income.

Infrastructure produced equipment for the construction, renovation, and repair of public works and private projects, as well as golf carts and utility vehicles.

Security and Safety segment This segment accounted for 15% of consolidated sales and 43% of segment income.

Security and Safety produced a broad array of commercial and residential security and safety products, including steel doors, electronic-access control systems, and personnel-attendance systems.

Industrial Solutions segment This segment accounted for 33% of consolidated sales and 22% of segment income. A

group of diverse businesses, Industrial Solutions was divided into three major subsegments: Air Solutions, Engineered Solutions, and Dresdner-Rand. Air Solutions made such products as motion-control components, gas and other compressors, and fluid products. In 2002, Air Solutions reported revenues of $1.3 billion. Engineered Solutions, with sales of $1.2 billion, comprised IR’s worldwide operations relating to precision bearings and motion-control components. Dresdner-Rand, with sales of $1.024 billion, produced energy-conversion technology for the oil, gas, and chemical industries.