Jul. 22–Did somebody know that Dana Corp. was going to be a takeover target? Or did a handful of savvy investors act on a hunch? Or did some of the auto parts maker’s shareholders buy more stock onthe theory that the firm was back on track for profitability?
For whatever reason, Dana’s stock performed far better than the market as a whole in June and early July — the period in between a private, “friendly,” takeover offer by ArvinMeritor Inc. and the Southfield, Mich., firm’s publicly announced hostile bid for Dana.
In the 24 trading days between those two events, Dana’s stock rose nearly 25 percent, while major stock indexes gained 3 to 6 percent and stocks of 24 auto-parts suppliers gained an average of 6 percent.
“There was obviously some kind of a leak,” said Robert Chapman, Jr., managing member of Chapman Capital LLC, a private hedge fund in El Segundo, Calif. “Lots of bankers and lawyers were involved from the start,” added Mr. Chapman, whose firm sold 100,000 of its 220,000 Dana shares the day the hostile bid was announced. “Sometimes, a person can talk to a CEO and get a strange vibe [that signals something is up].”
In retrospect, Dana’s rapid price rise does raise eyebrows, said Michael Holly, manager of a suburban Toledo branch of Wachovia Securities. “The price per share may indicate something, maybe not,” he said. “There are so many variables. … The coincidence between the offer being made [privately] and the price climbing is pretty high.”
However, he added that his firm’s traders believe the price may have risen simply “because Dana had been turning things around. Obviously Dana had been talked about as being underpriced.”
Months before the hostile takeover bid, Dana and ArvinMeritor executives had discussed the possibility of merging the two firms’ automotive repair-parts businesses, but the talks broke down.
On July 8, when ArvinMeritor launched its tender offer, Larry Yost, its chief executive officer, told analysts he had called Joe Magliochetti, Dana’s CEO, on June 4 and offered $14 a share to buy Dana. Mr. Magliochetti turned down the offer. Dana’s stock had closed at $9.63 the previous day, June 3.
Mr. Yost wrote a letter dated June 4 reiterating his offer. Mr. Magliochetti responded with a phone call on June 12, and a letter dated June 13, again turning down the offer. On June 16, Mr. Yost sent letters to all 11 Dana directors, reiterating his interest in buying Dana. And on July 8, ArvinMeritor went public with its offer — this time at $15 a share.
The fight for Dana was on. That day, Dana’s stock gained 35 percent, to close at $16.20, up from $12.02 on July 7, and a phenomenal 12.5 million shares were traded.
It’s hard to pinpoint what sparked investor interest in Dana’s stock in recent months. The stock tanked in March — along with a lot of other auto-related stocks — as the economy sagged and war in Iraq loomed large. Dana bottomed out at $6.31 a share on March 14.
In the 11 weeks from mid-March to early June, Dana’s stock gained nearly 53 percent. By July 7, it was up more than 90 percent from its bottom. And by the end of the day the hostile bid was made, it was up 157 percent from the bottom. Impressive, but still a far cry from its peak of $61.50 five years ago, long before its widespread restructuring.
Part of Dana’s price rise could be explained by its relatively large holdings by institutional investors such as mutual funds, noted Gary Corrigan, Dana’s director of corporate communications. “We’re 70 percent owned by institutions. … If an institution exits, the price goes down; if an institution enters, it goes up, and [they] don’t have to announce purchases until they acquire 5 percent [of outstanding stock].”
Mr. Corrigan noted that although there were scattered bits of good news about Dana in June — including a slightly higher credit rating from one agency -there was no single news announcement in June or early July that would account for the 25 percent gain.
Another possibility is that while most analysts have been cool to the auto-parts industry, or neutral at best, a few dared to predict better things for the near future.
Among them are analysts at R.W. Baird & Co., who upgraded their opinion of Dana in May, when it was under $10 a share. Baird gave an “outperform” to both Dana and ArvinMeritor and set a price target of $15 for Dana (exactly what Arvin offered two months later).
ArvinMeritor’s own stock purchases could have helped bid up the price of Dana’s stock, but probably not much. The company revealed last week it had bought 1.1 million shares of Dana in June, but a total of nearly 24 million Dana shares traded that month.
At the start of this year, Dana’s volume was averaging less than 600,000 shares a day, but in recent months it has averaged nearly a million shares a day. And in the 10 trading days since the hostile bid, more than 33 million shares have changed hands.
In the 24 trading days leading up to the hostile takeover bid, ArvinMeritor’s stock gained 14 percent, but most other parts makers gained less than 10 percent in price, and five of the 24 in the peer group lost stock value.
Spokesmen for both the New York Stock Exchange and the U.S. Securities and Exchange Commission said their rules prohibit confirming the existence or non-existence of an investigation into unusual trading in the stock. But NYSE says it monitors all news announcements and uses sophisticated technology to track trading.
So, who knew? Who knows?
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