How Not to Buy a Car Company (int'l edition)

The only thing missing from the tale was sex. It had ambition: Bernd Pischetsrieder, the bearded, maverick chief executive of BMW, bought British Aerospace's 80% stake in Rover in 1994 in an attempt to transform the luxury British carmaker into a high-volume player. The story had international intrigue: The Germans snatched the company out from under Honda Motor Co., which owned 20% of Rover--thus depriving the Japanese competitor of its key foothold in Europe. The match-up even had a warm-and-cuddly angle: A great uncle of Pischetsrieder was the engineer who designed the original Rover Mini.

Soon, though, BMW's $1.3 billion investment in Rover became a stark and expensive lesson in how not to buy a car company. After bleeding for five years, Rover lost $1 billion in 1998, dragging BMW group profits lower and forcing Pischetsrieder to resign last February. The lesson for Honda, Japan's feistiest carmaker, is especially clear: Unless you're one of the biggest players, with piles of cash, you can't afford to make any big mistakes while trying to stay independent. One false step and all can go dreadfully wrong.

BMW's first mistake: The Germans were too nice to their new British teammates. In their efforts to avoid cartoons of storm troopers marching into England, BMW kept an arm's-length relationship with Rover management. But BMW missed the chance to pool resources and save money in the way the newly merged DaimlerChrysler is doing.

Mistake No. 2 was that BMW didn't sort out the branding of its cars. Rivals thought Rover would generate mass-market demand for BMW. But BMW tried to position Rover as a premium brand--even though its cars were distinctly midmarket. But customers didn't buy it. ''Everyone knew they were bastardized Hondas,'' says John K. Lawson, an auto analyst at Salomon Smith Barney.

COMING TO A HEAD. High drama propelled the story throughout. Pischetsrieder's lieutenant, Wolfgang Reitzle, disagreed vehemently with the strategy at Rover. Reitzle wanted to keep the profitable and popular Land Rover line of sport utilities and the classic Mini and ditch the mass-market models. The battles between the two men spilled into the media. It all came to a head at a supervisory board meeting in February. Pischetsrieder resigned, followed quickly by Reitzle, who lacked the backing of the whole board.

BMW would probably be a takeover target now were it not for the Quandt family, which holds 47% of the German auto maker. Their block is not for sale at the moment.

Like Honda, BMW has strong fundamentals. The BMW car line generated nearly $1 billion in free cash flow last year. The trouble was, most of that money was sucked up by Rover. Now, new chief Joachim Milberg has moved swiftly to take control of Rover. He will invest $16 billion over the next five years to introduce new models and beef up sales and production for the whole group. One-third of the investment will go to British operations. German engineers are already at work on the R30, a new high-volume small car to replace the 200/400 series. He expects Rover to break even in 2002. ''We are one company now,'' declares Milberg.

If Rover is not fixed, will BMW's inside shareholders lose their resolve and sell out? The question is often raised by carmakers, many of which would love to have BMW in their stables. Honda executives, take note: A BMW-style misstep could cost them dearly too.

By Karen Lowry Miller in Munich

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