Bumpy Road Ahead: The Automotive Interiors Merger

That Wasn’t

Author: Milton Sousa, Lauren Comiteau

Pub. Date: 2021

Product: SAGE Business Cases

DOI: https://dx.doi.org/10.4135/9781529754889

Disciplines: Business & Management, International Business & Management, Leadership, Strategic

Management, Managing Across Cultures, Cross-Cultural Leadership, Mergers & Acquisitions

Access Date: December 14, 2022

Publishing Company: Rotterdam School of Management, Erasmus University

City: London

Online ISBN: 9781529754889

© 2021 Rotterdam School of Management, Erasmus University All Rights Reserved.

Abstract

This case is about the merger & acquisition (M&A) process between American Automotive, Inc.

(Smiths) and BarcelonaBrand Auto, Inc. (BBA). While the case is written in a fictional style, it is

inspired by a real story with many similarities to what is portrayed. The case takes place within

the automotive components industry and describes an acquisition and later merger between a

much larger company, based in the USA, selling standard automotive components and a much

smaller company based in Spain, selling customized automotive components for the luxury seg-

ment. What seemed to be a great strategic deal turned out to be an integration nightmare high-

lighting the importance of understanding national and company cultures, different leadership

styles, deal valuation and specific distinctions in business models in M&A. The key question of

the case is: what had gone wrong in this merger in such a little time?

Case

All eyes were on Luis Barros as he took his seat at the head of the oval mahogany board table in his

Barcelona headquarters and ran a commanding hand through his thick mane of white hair. As president,

founder and CEO of BarcelonaBrand Auto, Inc. (BBA), he was used to the attention and, frankly, adoration.

But today, an unusually windy March morning in 2008, Barros was uncharacteristically sharing the limelight.

Seated next to him was the somber Alan A. Smith, Jr., president of Smith Automotive Company, Inc. (Smiths),

the American multinational corporation that a little more than a year ago bought BBA and merged the two

companies in what was hailed as the merger of the decade—a “smooth ride if ever there was one,” predicted

financial weekly Barron’s at the time. Now Barros and Smith had come to announce the dissolution of the

company to its board and top management. What had gone so wrong in so little time?

Invention and Innovation

Visionary Luis Barros had long been a superstar in the design world of the automotive industry. An engineer

and designer by training, he was an inventor at heart. In 1985, foreseeing the rise of the coffee-to-go phenom-

enon, he patented the world’s first integrated cup holder for automobiles. Mercedes and Jaguar immediately

became his first two customers and also investors.

By 1995, Barros decided to start his own firm to control all elements in the manufacture of his integrated cup

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Page 2 of 8 Bumpy Road Ahead: The Automotive Interiors Merger That Wasn’t

holder system instead of outsourcing its production as he had been doing for years. Barros also wanted to

expand into the luxury market of auto interiors and had recently patented his design for an innovation in air

vents that again had Mercedes and Jaguar placing huge orders and agreeing to put up capital for Barros’

venture. They were looking forward to more innovative products from the master. It was a niche market, and

Barros knew with a company behind him, he’d be able to offer customized products to his clients.

In the summer of 1995, BBA set up shop in Barcelona’s La España Industrial Park. Barros’ status as inventor

of the coffee cup holder allowed him to break into a competitive field, his name opening doors to an elite list of

clientele. It also secured him two more investors, CaixaBank and Oxford Capital Mgmt. in London (although

Luis Barros always kept the majority of the shares).

From 1995 until 2005 the company saw tremendous, double-digit growth. Barros was able to recruit the best

young designers and engineers to come work for him in Barcelona, mostly from within the country (something

he was proud of). While most of the automotive industry was based in the US, Germany and Japan, Barros

wanted to put Spain (and Barcelona in particular) on the automotive design map and make it an international

competitor in an industry not nascent to the country.

By 2005, he employed 250 people—mostly designers, engineers and sales reps—to design, produce and sell

not only his integrated coffee cup holder but his bespoke ashtrays, grills and storage boxes. BBA partnered

also with external famous designers for some signature products. Despite having developed some product

platforms, every solution was customized to the new car models of BBA’s loyal customers (most of BBA’s

turnover was based on repeat customers). BBA had an annual $40 million turnover, representing a 30% an-

nual growth rate, double that of the industry standard and an EBITDA of $4 million. Because his clients were

all located outside of the country, BBA developed sales teams in Germany, Japan and the US. By 2003, BBA

was named one of Europe’s 500 fastest-growing companies, a recognition, said Barros, which showed his

company’s commitment to “entrepreneurial spirit, innovative management, business growth and employment

creation.”

The head-office of BBA reflected its modus operandus and pride. Apart from the somehow more exquisite

board room, BBA had highly functional open space to stimulate interaction and shared learning. On the walls

you could see some awards and accolades of BBA’s achievements. The office of Luis Barros was itself part

of the open space, and people could often hear his outbursts whenever projects would fail to meet his high

standards. He was proud of using the same old car already for years, something that always surprised BBA’s

employees.

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“Working for Barros was a both a blessing and a curse, but mostly a blessing,” said one longtime designer

on BBA’s payroll. “Barros was a visionary and a natural leader who inspired us all. But at the same time,

he was a micro-manager and control freak, and as sole authority at the company, his frequent angry tirades

had to be tolerated. But Barros believed in the company, believed in his products, believed in Spain and, ul-

timately, believed in us. His vision and commitment inspired us to do our best and we were rewarded both

financially and with the satisfaction that comes from seeing a vision become reality. We were like one big

family, slightly dysfunctional, but all working towards the same goal, and we gave ourselves over to it—and

our patriarch—completely and gratefully.”

Indeed BBA was run like a benevolent dictatorship. Barros’ young work force was highly committed, often

working 60 to 80 hour weeks. They were driven and ambitious and mostly not yet tied down by family de-

mands, able to thrive in Barros’ demanding workplace. At the same time the work environment was very infor-

mal and dress codes were relaxed, even among sales reps. As a young company, there was plenty of room

for growth, and the thrill of being a successful start-up kept the entrepreneurial spirit alive as BBA constantly

looked for new cutting-edge products to design and manufacture, radio bezels and utility trays among them.

The mission of BBA, devised by Luis Barros, was the same since the founding of the company: “To become

the supplier of choice for customized automotive component solutions, based on innovative and state-of-the

art engineering”.

By 2006, with the luxury auto market booming, Barros was looking to grow his business, hoping to get out of

the niche market by producing a few standardized high-end versions of his staple products, mostly his inte-

grated coffee cup holder that could be sold more off-the-shelf. He needed more financing, but didn’t want to

give up control of his private enterprise or see its brand name dissolve. Historically, BBA ran on reinvested

profits and external capital from its two financial partners. While a public offering would have solved Barros’

financial problems, it didn’t mesh with the vision he had for BBA. Barros wanted to keep control of the compa-

ny and not be beholden to bottom lines and shareholder demands. In short, he wanted someone to fund his

expansion—his way, his goals, his vision.

Enter Smith Automotive Company Inc. (Smiths).

Smiths: An American Story

Although Smiths, like BBA, was in the automotive interiors business, the company was as different from BBA

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as Ladas were to Cadillacs. Started by Alan A. Smith, Sr. in Michigan in 1955, Smiths had been listed on

the NY Stock Exchange since 1960 and represents corporate culture at its finest. Its board had long been

beholden to its shareholders, and as CEO, Alan A. Smith, Jr. had made his father proud by overseeing a

tightly-run organization with global reach that, by 2006, employed 320 people and had an annual $200 million

turnover. The new corporate head-office of Smiths, recently renovated, demonstrated its growth process and

the motivation of Alan A. Smith, Jr. to belong to the American elite of corporate CEOs. The new lavish board

room and executive office, a source of discomfort among some blue collar workers, was designed to impress

and signal the world about Smith’s ambition to grow into a truly global corporation. Sales teams were highly

professional, formal (implicit dress code was to always wear suit and tie, even in the office) and commercially

driven.

Unlike BBA, Smiths specialized in standardized interiors, holding the number four position in its sector. It pro-

duced the big basics for automotive interiors: seating, instrument panels and cockpits, interior lighting, floor

consoles and overhead systems. Its products were sold off-the-shelf. Smith’s partners included some mold

manufacturers and a wide range of distributors.

But Smiths was facing increasing competition from Asian automotive interior producers, especially in China,

and started looking at the possibilities of acquiring a complimentary firm that would allow it to sell complete

interiors—from the control panel and lighting right down to the coffee cup holder. Smiths wanted to be a one-

stop shopping manufacturer for automotive interiors, challenging its competitors by offering its clients a full

range of everything they needed for their auto’s insides. The newly devised mission of Smiths incorported this

ambition: “A full Smiths interior in every car”.

BBA seemed the ideal candidate: the Spanish start-up was cash rich and a world leader in its niche market.

Its products had stood the test of time and the company had good brand recognition. In addition, the customer

base of both Smiths and BBA was complimentary: Jaguar and Mercedes, for example, were customers of

both companies, with Smiths providing the interior necessities and BBA the luxuries. If the two firms merged,

they’d be able to provide a complete package to their clients, who would never have to seek business else-

where. On paper, this merger looked perfect.

The Merger

In February of 2007, the deal was made: Smiths bought BBA for the astronomical sum of $160 million, four

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times the turnover of BBA. Many industry observers questioned why Smiths, who paid mostly in cash, would

virtually empty its coffers to pay such an inflated price for the Spanish start-up.

But at the time, both companies thought it was a good deal. Smiths and BBA had been in talks for almost a

year, and other companies had been making quiet offers to Barros. This led to a bidding war that put pres-

sure on Smiths to act—and act big. Smiths didn’t want to dilute its stock, so the deal had the backing of its

shareholders, who also knew they’d see a quarterly spike in earnings after the merger. Indeed, Smiths moved

its market position to number two after acquiring BBA. “Smiths has had an amazing year,” said Smith, Jr. in

announcing the merger. “Now with the acquisition of BBA, Smiths has strengthened our market position and

will be able to meet our clients’ demands for fully-outfitted automotive interiors.”

As for Barros, he and his two investors wanted cash, and being acquired offered more opportunities than

going public. It also allowed Barros to hold on to his company. Under the terms of the deal, BBA, while re-

maining in Spain, became a business group of Smiths, with its products continuing to be sold under the BBA

brand. Barros became the group president and General Manager and got a seat on Smiths board. The sales,

finance, legal, HR and marketing functions were to be consolidated, but each company’s design teams, engi-

neers and R&D people would stay intact and work in parallel, as they had different know how and specialties

with few overlapping elements.

Barros envisioned the merger resembling the one between Air France and KLM, where each company would

retain its brand identity. “With the combined forces of Smiths and BBA,” Barros told the world, “for the first

time out clients will be able to fully outfit their automotive interiors without ever having to look elsewhere. This

is a game-changer in the world of automotive interiors.”

The Problems

No sooner had the ink dried on the acquisition than the problems began appearing.

The most obvious one was the structural change to the new company that left everyone feeling cheated. Al-

though Smiths and BBA were to keep their separate identities, in reality, Smiths wanted to merge BBA into its

own corporate structure. Barros’ KLM-Air France vision was quickly dashed.

Nowhere did this policy manifest itself more disastrously than in sales. While BBA kept some of its functions

intact, Smiths’ insistence that the sales teams be integrated was a failure. Used to selling standardized prod-

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ucts, its one-size-fits-all sales mentality couldn’t cope with individual client requests for customized products

(including the one-off wealthy financier looking for a completely customized interior) that BBA’s sellers were

able to accommodate.

And selling in the luxury market was a whole different ballgame from selling to mass producers of workhorse

cars, one which Smiths’ sales team couldn’t get its head around when approaching its new market. Although

the products had looked complimentary on paper, in reality, they were a bad fit.

“Smiths mismanaged the merger,” said one BBA sales rep. “Its integration dogma undermined our sales or-

ganization, turning it into a disaster.”

The acquisition also put Smiths in a competitive position vis-à-vis a few of its clients, who also made some

of their own smaller interior products such as radio bezels and grills. Feeling threatened by the new Smiths,

they took their business elsewhere.

While Smiths did get an initial revenue boost after the merger, that faded after the first quarter. Smiths, who

wanted BBA to start contributing to the company’s revenue as soon as possible, had used almost all its cash

to fund the merger and subsequently had to borrow money at a high premium to keep its operations going.

It became clear that the inflated $160 million price tag Smiths paid for a company with a $40 million turnover

didn’t make financial sense.

This led almost immediately to cost-cutting measures, including layoffs, with BBA people the first to go. While

still showing some growth, Smiths was well behind the industry standard by late 2007. Further, its time spent

on BBA development took away from its own R&D when it came to its core products—lights, navigation sys-

tems, seating—giving the competition a leg up.

Smiths, however, blamed the new company’s failures on the world’s softening economy, which by 2008 was

reaching disastrous proportions, especially in Spain where the housing market went bust. BBA employees,

though, insist demand for luxury cars was not hugely effected, although the demand for cars in general did

plummet, hurting Smiths, which in turn hurt the merged company.

“Smiths brought us down in a way that never would have happened if the merger hadn’t happened,” said one

bitter BBA employee. “We would have seen some slowdown in growth for sure, but we would have been able

to keep our heads above water until the economic turnaround, when again you saw a rise in demand for lux-

ury and specialized automotive components.”

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BBA employees were used to their mostly-benevolent dictator, the visionary who despite his outbursts, in-

spired his workers to go above and beyond in the name of his privately-owned and very personal brainchild.

Barros was BBA. After the merger, with boards and reports and interfering investors and shareholders to con-

tend with, BBA employees lost the motivation that Barros, personally, had always been able to summon.

Smiths was more detached. Its workers lacked the drive and sense of mission that BBA’s employees had and

took a more laid-back approach to their work, focusing on numbers and the bottom line.

Integration was a failure. Disagreements on the board lead to Barros’ resignation a few months later, allegedly

to “pursue personal interests” but in reality, due to his resentment at having to report to a new COO. During

the year’s third quarter, Smiths announced a $120 million write-off, announced job cuts as part of restructur-

ing, and saw its stock lose 5 percent of its value. In addition to the softening of the market, Smiths eventually

acknowledged that “delays in the synergies of the companies” had hurt.

In the end, what had looked like such a promising merger on paper and had been hailed by the industry as

the breakthrough deal of the decade was over just 13 months after it began. What went wrong exactly? Was

there a way to prevent the dissolution of the company?

Epilogue

BBA was eventually sold to the Stallion Group in a $45 million cash deal. On the plus side, the Spanish com-

pany continues producing quality automotive interiors of exceptional design, proving that a homegrown Span-

ish company could achieve global market leadership in an unfamiliar market. Many of BBA’s employees went

to Stallion, while a degree in automotive design has been introduced at Barcelona’s Technical University.

https://dx.doi.org/10.4135/9781529754889

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