Emerson raises heat on Rockwell Automation with $29B bid
(Bloomberg) -- Emerson Electric Co. Chief Executive Officer David Farr raised the pressure on Rockwell Automation Inc. with a sweetened offer to create a titan in the market for efficiency equipment and software.
Boosting the price of the cash-stock bid by 4.7 percent to $29 billion, or $225 a share, Farr also went public with his letter and supporting documentation -- on the morning of a previously scheduled Rockwell investor presentation, no less.
The letter showed a more aggressive communications strategy by Emerson, which made its previous two overtures privately before they eventually leaked out. Farr, 62, has had his eyes on acquiring Rockwell for more than a decade and is running out of time to get the deal done, said RBC Capital Markets analyst Deane Dray.
“His press release has as much direction to the investor base as it does the Rockwell management,” Dray said from Houston, where Rockwell was holding its meeting. ‘‘You’ve got a concentration of buy-side analysts in one spot in front of management. So, what better time to put the issue back on the table very loudly?”
Emerson is seeking to bolster its offerings by adding the leading supplier of software and controls for assembly-line operations. The would-be acquirer mostly serves the process side of the business, providing software and equipment for products made by combining ingredients, such as chemicals, oil refining, pharmaceuticals and beverages.
The new proposal increases the cash portion to 60 percent from 50 percent. It offers a 30 percent premium to the 90-day volume-weighted average share price as of Oct. 30, St. Louis-based Emerson said in a statement Thursday.
Rockwell shareholders would own 22 percent of the combined companies, which Emerson said would have profit margins of about 20 percent and “double-digit” earnings growth.
“The industrial logic for this combination is clear,” Farr said in his letter to Rockwell CEO Blake Moret. “By leveraging the key technology platforms that are the strengths of Emerson and Rockwell, we can create an industry leader with unmatched capabilities that integrates all aspects of the automation system for a global customer base.”
Rockwell said it had received the proposal and would respond in due course. Rockwell climbed 4.2 percent to $196.61 at 1:10 p.m. in New York, putting the stock up 46% this year. Emerson was little changed at $59.36.
Milwaukee-based Rockwell rejected offers of $200 a share in August and $215 a share in October, maintaining that it was better off alone with its successful Logix product that gives customers a single software platform to build on instead of learning multiple ones. The company has attempted to move into process automation, where Emerson has a stronghold, to accelerate growth.
“Over the past decade, our investments in technology and globalization have enabled us to expand our addressed market to over $90 billion,” Rockwell said in its Nov. 15 annual filing to the Securities and Exchange Commission. “Our process initiative has been the most important contributor to this expansion.”
Emerson likely will start lobbying Rockwell’s shareholders with “shuttle diplomacy” on what is a fair proposal, Robert McCarthy, an analyst at Stifel Nicolaus & Co., said in a note to clients.
“We do think it is a compelling offer for the company, given the increase in overall bid and increased cash component,” he wrote.
An acquisition of this size also would help rebuild Emerson after Farr lopped off almost a third of sales during a two-year restructuring process. He began building network power, which supplied equipment for computer servers, after taking over as CEO in 2000 and battled low-cost Asian competitors.
Farr has said that Rockwell has been talking for a long time about the importance of increasing its share in the $200 billion global process-automation market but hasn’t made much headway. A combination “fulfills customer demand for an integrated solution -- not a single platform -- that combines the best devices at the plant level with controls and software that work effectively together,” Emerson said in its slide presentation supporting the latest offer.
Price RiskThe risk for Farr is that he may end up overpaying if the efficiency and sales gains he expects from adding Rockwell Automation don’t pan out. Emerson estimates the total value of synergies with the combination would be more than $6 billion, which translates into $1.3 billion, or $10 a share, of more value for Rockwell shareholders. JP Morgan Chase & Co. agreed to finance the transaction, Farr said.
The deal would lock in very low returns for years and put constraints on Emerson’s finances, Cowen & Co. analyst Gautam Khanna said in a note to clients.
“We believe it doesn’t make economic sense,” he wrote.
RBC’s Dray sees strategic logic, however. The price is “frothy” and the success will depend on how much efficiency gains will result from the acquisition.
“This is still a ways away from a finish line, but the ball got moved further,” he said.