In chasing Rockwell, Emerson tried to buy what it couldn't build
(Bloomberg) -- Emerson Electric Inc.’s spurned $27.6 billion bid for Rockwell Automation Inc., while not quite a desperation play, would have given its longtime boss an opportunity to buy what he failed to build.
Chief Executive Officer David Farr spent most of his 17 years at the helm of Emerson building up a business that sold computer power equipment, only to pull the plug after competition from Asia drove down profits. Rockwell, in contrast, exploited rising demand for efficiency by focusing on the software that drives factory automation.
In the last three years, shares of Rockwell jumped 79 percent while Emerson’s have gained less than 1 percent.
“Emerson needs Rockwell Automation much more than Rockwell Automation needs Emerson,” said Jeffrey Sprague, an analyst with Vertical Research Partners. “In fact, Rockwell Automation probably does not need Emerson at all.”
At 62, Farr has already been thinking about his legacy. Just two years ago, he shed the network power unit that had failed to prosper as he envisioned, saying he didn’t want it “on his tombstone.” Grabbing Rockwell would have made Emerson one of the largest automation companies and given him a chance to chisel a different epitaph.
Rockwell surged and Emerson declined on Tuesday after the companies said Farr’s offer was rejected and merger talks had ended. Farr’s half-cash, half-stock bid of $215 a share was a $15 bump-up from an earlier unsolicited offer in August that was also rejected, Rockwell said in a statement Tuesday.
Farr spent the past year reorganizing Emerson to focus on more profitable endeavors. He sold off the company’s weakest businesses and redivided the remainder into two units, one focused on automation. That set the stage for the CEO to rebuild, and in August he talked on a conference call about seeking acquisitions of less than $1 billion.
His bid for Rockwell stretched well beyond those intentions, raising eyebrows among analysts.
“We believe this begs the question, is something wrong at Emerson that could be compelling the company to pursue this aggressive and seemingly inconsistent strategy?” John Inch, an analyst with Deutsche Bank, wrote in a note on Tuesday.
Emerson’s offer for Rockwell may inspire other suitors, including Honeywell International Inc., said Scott Davis, an analyst with Melius Research. Rockwell would be a coveted target for its focus on making software and equipment used to control robotics and other automated systems in factories.
“We’d expect others to jump in,” Davis said. “It’s the best pure-play automation asset in the world right now.”
Rockwell may be difficult to purchase because of its rich valuation. The offer price was 30 times earnings at Monday’s close, compared with 21 times for the Standard & Poor’s 500 Industrial Index. Renewed sales growth and higher capital spending is giving Rockwell a boost as manufacturers seek to spend on automation to increase capacity and efficiency. The stock has surged 49 percent this year, compared with a 12 percent gain for the S&P industrial gauge.
Rockwell’s continued rise makes it less likely Emerson will try to launch a hostile bid, Robert McCarthy, an analyst with Stifel Financial Corp., said in a note. “Investors openly question whether Emerson has the wherewithal to fund the deal,” he said.
Rockwell shares rose 7.4 percent to $200.82 at the close in New York Tuesday, after jumping as much as 13 percent, the most intraday since April 2009. Emerson fell 4.3 percent to $64.46, the biggest decline since August 2016.
Farr’s pursuit of Rockwell, a major player in the rapidly growing robotics marketplace, would have expanded and broadened Emerson’s own automation business, which is geared more to the oil-and-gas industry.
“It would be a dream for Emerson to own it,” said Davis, the Melius analyst. Rockwell “fits perfectly, lots of synergies.”
Farr has been more successful with smaller acquisitions lately. Emerson completed a $3.15 billion purchase of Pentair Plc’s valves and controls business in April. It agreed on Oct. 16 to pay $510 million for Paradigm, an oil-and-gas industry software company, and earlier this month bought GeoFields Inc., which collects data on pipeline integrity.