Cummins Inc., which is rapidly transforming from solely a leading maker of diesel engines into electric powertrains and zero-emissions technologies, said Tuesday it will pay $3.7 billion in cash to acquire Meritor Inc., merging their distinct traditional and advanced technology components.
“The two companies are largely complementary,” Cummins CEO Tom Linebarger said on a call with analysts. “Almost everything Meritor’s been working on Cummins has not been working on and vice versa. And the two companies are going to combine investments to provide much more economically viable solutions.”
It is unclear whether the Meritor name will live on. Both Cummins and Meritor, spun off from Rockwell International in 1997, are more than a century old.
The size of the transaction is the same amount that Volkswagen AG’s Traton Group paid to acquire Navistar International Corp. last year. BorgWarner Inc. paid $3.3 billion to acquire the assets of one-time No. 1 automotive supplier Delphi Technologies in 2020 after Delphi split off its autonomous and advanced technologies unit to create Aptiv PLC. Only the $7 billion merger of ZF and Wabco Holdings in 2020 was bigger.
Watch now: Cummins’ big move to buy Meritor and what it may mean for Hyliion
Earlier this month, Columbus, Indiana-based Cummins agreed to pay $300 million to acquire Jacobs Vehicle Systems, a maker of engine cylinder deactivation technologies, in a move to meet tougher nitrogen oxides emissions regulations.
Several months of talks
Cummins (NYSE: CMI) and Meritor had been in talks for several months leading to Tuesday’s announcement. Cummins is paying $36.50 a share, a 48% premium to Meritor’s closing stock price last Friday. Meritor (NYSE: MTOR) shares were up 45% intraday on Tuesday. Cummins’ shares were down less than 1%.
“We believe we can operate the two companies at substantially lower cost per dollar of revenue than we can operate them separately,” Linebarger said. “We’ve been looking for ways to invest in a financially disciplined way in components that build out our entire portfolio and are more engine agnostic.”
Cummins had $24 billion in 2021 revenue compared to Meritor’s $3.8 billion.
“It’s a relatively small company,” Linebarger said of the Troy, Michigan-based Meritor, which has 9,600 employees compared to 59,900 for Cummins. “We think we can offer significant synergies on SG&A [sales, general and administrative expenses], supply chain, footprint kind of issues.”
Cummins plans to grow Meritor’s core axle and brake businesses, which fits into Cummins’ components business. Similar cultures and operational styles should smooth the transition, Linebarger said.
Best known for diesel engines, Cummins is rapidly bulking up in electric and fuel cell-electric powertrains under its recently created New Power unit.
The new engine block
“We think we can be at the table now for pretty much every negotiation about who’s going to supply what in the commercial industrial sector,” Linebarger said.
A key to the deal was acquiring electronic axle know-how, which Meritor itself grew through the acquisition of AxleTech International in May 2019. Meritor also acquired the remaining assets of electric driver maker TransPower Inc. in 2020 after making four separate earlier investments.
“We had done strategy work in our new power area to say what are the key systems and components that we want to invest in versus purchasing outside,” Linebarger said. “E-axles and traction kept arising as one of the areas that we needed to be in in a serious way.
“In an electric powertrain, you lose the engine as a place to hook everything to. The e-axle becomes the new engine block where you start to hook all the components to.”
The merger allows Cummins to approach alternative powertrains in the holistic way it does traditional engines.
But why buy Meritor outright rather than create a joint venture as it has with Eaton Corp. for automated manual transmissions? Linebarger said combining Meritor with Cummins creates “one of the very few global companies” capable of offering a full range of powertrains for internal combustion, electric and fuel cell-electric applications.
“There were very few candidates that fit that bill,” he said. “Meritor is one we had been talking about for some time.”
And Meritor’s board decided it needed a partner to grow its business.
The deal, if approved by regulators and Meritor shareholders, will immediately add to Cummins’ earnings and will generate $130 million from synergies by the third year. Cummins CFO Mark Smith said taking on Meritor’s debt will require slowing Cummins’ $2 billion share buyback program authorized in December.
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