ABB Ltd. Chief Executive Officer Joe Hogan has opted to take nibbles rather than bites out of the company’s $9.4 billion in cash reserves as the Swiss company seeks to add to its range of power-supply equipment.
ABB announced an agreed bid for Chloride Group Plc of 864 million pounds ($1.3 billion) in cash yesterday, one month after a similar-size takeover for software maker Ventyx. Takeovers of this size are more “digestible” and easier to integrate, Hogan said in an interview.
Hogan took over ABB in 2008 with a track record of deal making at General Electric Co., where as an executive he made its then-biggest purchase by buying Amersham Plc for about $10 billion in 2004. Before contemplating acquisitions at ABB, Hogan fought the financial crisis by accelerating an overhaul of the Zurich-based power-grid maker to save $3 billion in 2010.
“You have the execution done at division level so there’s not too much to absorb,” Hogan said. “I’ve been in this job now for about two years and a lot of people have asked what we plan to do with our cash. It takes a lot of work to figure out what companies make the most sense.”
ABB’s cash reserves swelled to $9.4 billion in March. Even with the purchases of Ventyx and Chloride done, and a potential $1 billion spent on increasing its stake in an Indian subsidiary, cash reserves would stand at $6.2 billion, Moody’s Investors Service analyst Sabine Renner and colleagues said in a note yesterday.
With a customer base spanning data centers and hospitals, the London-based manufacturer of back-up power equipment will complement ABB’s factory robots and automation equipment, according to Hogan. Annual revenue rose 2.8 percent to 336 million pounds and the British company said May 24 that an overhaul will save 3.8 million pounds a year in costs.
Chloride’s services division has proved resilient to the financial crisis and that area will be expanded under ABB’s parentage, Hogan said.
The British manufacturer already attracted the interest of Emerson Electric Co., which had an indicative bid of 723 million pounds turned down. The St. Louis-based company is considering its options following ABB’s move, it said in a statement yesterday.
Hogan’s strategy centers on filling the “white spaces” in ABB’s offering rather than looking for new markets, the executive said after announcing the agreement.
“It’s always been clear they weren’t looking at a major acquisition, more small to mid-size acquisitions in niche segments complementing their smart-grid offering,” said Standard & Poor’s equity analyst Virginie Vacca. “Perhaps also for cultural reasons it’s much easier for them to integrate smaller companies.”
Better Than Cash
Adding so-called uninterruptible power supply gear leaves ABB encroaching on the market shares of Emerson, Eaton Corp. and Schneider Electric SA, while its foray into industrial software impinges on companies like SAP AG.
Hogan said he was pushed to act on Chloride sooner than expected after Emerson began its pursuit of Chloride. Spurned by management, Emerson’s proposal failed to spark negotiations, forcing the U.S. company to appeal directly to investors.
By contrast, Hogan said it was easy for him to pick up the phone to Chloride CEO Tim Cobbold after having discussed collaboration over an 18-month period.
“He has certainly taken his time to look at it,” said Vontobel analyst Panagiotis Spiliopoulos. “You don’t have to buy something huge. These are all growth options. These are not restructuring cases. If it’s accretive, it’s better than cash.”
The Swiss company, itself the result of a merger of BBC Brown Boveri of Switzerland and ASEA AB of Sweden in 1988, still has the appetite for more purchases, though it’s committed to an investment grade credit rating, Chief Financial Officer Michel Demare said on a call. Moody’s yesterday reiterated its A3 rating on ABB debt.
“We obviously have the balance sheet to do a transformational deal,” said Hogan. “If there is access available and it would make strategic sense for ABB going forward to make much larger acquisitions, I would certainly consider it.”
The sudden flurry of deals contrasts with a decade of austerity after asbestos litigation threatened ABB with near bankruptcy in 2002. Prior to Ventyx and Chloride, it last spent more than $1 billion on a purchase in 1998, with the takeover of Elsag Bailey Process Automation NV for $2.1 billion from Finmeccanica SpA.
The thriftiness chimes with events at Siemens AG, Europe’s largest engineering company. The German maker of trains, turbines and factory automation gear has limited itself to minor deals, including the purchase of an Israeli solar thermal power company for about $418 million.
“I was really surprised when I came in that anyone could characterize me as an M&A guy,” said Hogan. “I have been an organic growth and operations guy.”