By Boris Ladwig, The Republic City Editor
Cummins Inc. shares spiked as high as $91.45 early Tuesday, as a Reuters report pointed to "takeover expectations" a day after a European auto maker said it plans to expand its truck division to North America.
Shares fell steadily after reaching the peak but still finished at a record-high close of $85.55, up 0.93 percent from Monday, when shares closed up roughly 9.5 percent.
Bear Stearns upgraded Cummins stock Tuesday, and Reuters reported the Columbus-based engine maker "has been a target of takeover expectations."
Italy-based automaker Fiat said in an earnings conference that its commercial vehicle subsidiary Iveco is pursuing an expansion strategy that includes North America.
"We continue to be interested ... for Iveco to play in the U.S.," said Fiat Chief Executive Officer Sergio Marchionne. "The U.S. is a big market which is of interest to us."
Though he said that he could not say how Iveco would enter the North American market, he said the company was continuing to look for ways to make that happen.
Cummins' Director of Public Relations Mark Land said the company does not comment on acquisition/takeover speculations.
Fiat reported revenues of roughly $18.7 billion and net income of about $513 million. The company said Iveco had its best ever first quarter.
Cummins has reported three consecutive record years, earning $715 million last year.
Its share price has surged nearly 14 percent in the last week and about 45 percent this year.
Independents fading
An industry analyst said recently that more stringent emissions standards have pushed truck makers to acquire engine makers, meaning that the number of independent engine makers, such as Cummins, has declined worldwide.
More truck makers in America are trying to make their engines, said Mike Brezonick, associate publisher and editor-in-chief of Diesel Progress magazine.
"There's less room for independent engine manufacturers in North America, potentially."
Freightliner uses Mercedes and Detroit Diesel engines, and Schneider National Inc. runs mainly Freightliner trucks, Brezonick said.
Volvo last year developed a new engine family, though the company said that Cummins will remain an important partner.
However, Brezonick asked, if Volvo can sell a Volvo engine - rather than a Cummins engine - which engine would the company want to sell?
Truck maker Paccar Inc. bought a European truck maker that makes engines in-house, Brezonick said. International took a platform from truck maker MAN and developed an engine it expects to make in-house.
In Europe, trucks are sold only with engines manufactured by the truck maker: A Mercedes truck will have a Mercedes engine. Brezonick said the situation mirrors the North American off-road market: If you buy a John Deere tractor, it'll have a John Deere engine.
As emissions technology gets more complicated, some truck makers have said that making the engines in-house provides technological and financial advantages, Brezonick said.
They say it's advantageous, Brezonick said, though it could be advantageous just for them because they would be increasing their revenues by selling in-house engines. Whether the customer benefits, too, is questionable.
Competitive advantage
Cummins has guarded its independence fiercely, thwarting hostile takeover attempts and brokering deals to reduce the chances for such acquisitions.
Land said, the company knows the market dynamics and has dealt with them for years.
"From our perspective, vertical integration is nothing new," he said.
"Most of our largest customers already make their own engines, so we have considerable experience dealing with this sort of market dynamic.
"We feel our technological expertise, our focus on producing the best possible products and our commitment to providing first-rate customer service give us a competitive advantage in the market," Land said.
Brezonick, too, said that people routinely have bet against Cummins - and lost.
"They've always found ways to compete," he said.
Whenever he visits Columbus, he likes to tell people that if he had a nickel for every time somebody told him that Cummins was going to move, be acquired or go out of business, he would be rich and retired.
In July 2000, for example, Cummins shares spiked 18 percent after an analyst speculated that the company was vulnerable to a takeover.
In 1998, Business Week magazine reported that a large European auto maker was rumored to be interested in expanding its truck operations in the U.S. and that Cummins was the top target.
"They're doing a fine job at Cummins," Brezonick said. "To see how that company has evolved has been pretty amazing."
He said the company can build on top-notch technological capabilities, and the management has done an excellent job under challenging circumstances.
"I expect that Cummins is going to be making engines for a while," he said.