The Royal Tire Wedding: America’s largest tire companies tie the rubber knot
Blimp-worthy news... Yesterday, investors received an invite to the biggest tire wedding in America: Goodyear Tire & Rubber has agreed to buy Cooper Tire & Rubber for $2.8B (conveniently, they have the same last name). It's like the Royal Wedding, but for tires: Goodyear is the largest tire manufacturer in the US, and Cooper is #2. Investors celebrated the power couple:
- Cooper stock soared 29%, since Goodyear will pay Cooper shareholders a cash and stock premium (worth 24% more than Cooper's closing stock price on February 19th).
- Goodyear stock jumped 21%, since investors think the merger will boost sales and cut costs (#synergy). The deal also strengthens Goodyear's position as #1 in the US, and nearly doubles its presence in China (where car sales are surging again).
Strength in unity... and in cost synergy. The happy couple will shave spend by combining corporate functions, R&D, and procurement. Goodyear expects to save $165M over two years from the merger. No manufacturing jobs or plants are being scrapped... for now. But the couple sees an opportunity to combine production in the future. If approved by Cooper shareholders and regulators, the marriage will be finalized later this year.
Scale is key... to succeed in a commodities-heavy business. Tires are basic products made of basic commodities: rubber and steel. While you might have a preference between iPhone 12 and Samsung Galaxy S21, tires don't have as many differentiating features/components. So companies compete on price. With this marriage, Cooper and Goodyear can join forces to scale production — instead of trying to beat each other. But we don't yet know how/if this will affect prices for consumers.