Siemens Record Cash Fuels Concern Loescher May Overpay for Deals: Real M&A

Siemens AG (SIE)’s Peter Loescher may have to start spending a record cash hoard on acquisitions to combat three straight years of falling sales while proving to shareholders that he won’t overpay again.

Europe’s largest engineering company doubled its cash in three years to 18.5 billion euros ($27 billion), the second- biggest war chest among industrial companies, according to data compiled by Bloomberg. Siemens has used just 1.5 billion euros for takeovers since Chief Executive Officer Loescher’s first deal, the 5.1 billion-euro purchase of Dade Behring Holdings Inc. in 2007, was criticized as too costly by investors. He was forced to write down the value of that acquisition last year.

With business volume still more than 21 billion euros short of Loescher’s annual goal as he tries to outgrow rivals Schneider Electric SA (SU) and General Electric Co. (GE), Siemens plans to expand in emerging markets, industry automation and applications to improve power use. That means the Munich-based maker of power plants, high-speed trains and medical scanners may look at buying Itron Inc. (ITRI) for its so-called smart-grid technologies and Spirax-Sarco Engineering Plc (SPX) to add energy services, said Thomas Rowlands-Rees, an analyst with Bloomberg New Energy Finance.

“They are sitting on a pile of cash. It’s appropriate for them to be evaluating how they put their money to work through acquisitions,” said Walter Todd, who helps manage $950 million at Greenwood Capital in Greenwood, South Carolina. “To the extent that he does have a bad track record, that means each transaction will be scrutinized by investors that much more.”

Cash Pile

Alexander Becker, a spokesman for Siemens, declined to comment. A representative for Spirax-Sarco had no comment. Sharelynn Moore, a spokeswoman for Itron, didn’t return a phone call or e-mail seeking comment.

Cash and short-term investments at Siemens climbed 97 percent in the last three years to 18.5 billion euros as of March. That’s the highest among all of the 97 European companies in the Stoxx 600 Industrial Goods and Services Index and the most of any industrial company worldwide after Fairfield, Connecticut-based GE, data compiled by Bloomberg show. Cash holdings at Siemens reached a record 18.7 billion euros at the end of December.

“Siemens is a cash flow monster,” said Thorsten Winkelmann, who helps manage 4 billion euros at Allianz Global Investors in Frankfurt, including Siemens shares. “The cash they generate every quarter is adding to the pile. Cash doesn’t earn as much as money invested, so that does not make them look good.”

Relative Value

Investors are paying less for each dollar of earnings at Siemens than for its competitors. The company trades at almost 14 times profit, compared with 15 times at GE, 17 for Schneider, 21 at Rockwell Automation Inc. (ROK) and ABB Ltd. (ABBN)’s multiple of 22, data compiled by Bloomberg show.

“Siemens is one of the cheapest companies in its industries,” said Tim Albrecht, who manages 3.9 billion euros in equities, including Siemens shares, at DWS Investment GmbH in Frankfurt. “Given Siemens’s acquisition history, people are worried they’ll repeat past mistakes. I can’t imagine Siemens doing a large deal at a rich multiple.”

Three weeks after joining as CEO in July 2007, Loescher, 53, announced the $7 billion (5.1 billion euro) acquisition of Deerfield, Illinois-based Dade Behring, whose products test for illegal drug use and cancer, in the company’s biggest takeover since 2001, data compiled by Bloomberg show. The stock fell the most in four years the day it was announced. That deal was part of 11 billion euros spent on health-care takeovers in 2006 and 2007, prompting the company to write down the value of its health-care diagnostics unit by 1.4 billion euros last year.

‘Acid Test’

“Their next deal is the acid test for management strategy,” said Ben Uglow, an analyst with Morgan Stanley in London.

Siemens has indicated it will return cash to shareholders by boosting dividends before overpaying for an acquisition, DWS’s Albrecht said.

Loescher aims to increase revenue faster than Siemens’s rivals and in March set a goal to top 100 billion euros in overall business volume, defined as order intake plus sales, divided by two. Business volume was about 78.6 billion euros in the last fiscal year.

Revenue was almost 76 billion euros in the year ended in September and is projected to drop for a third straight year to 74.1 billion euros, based on analysts’ estimates compiled by Bloomberg, as Loescher separates off businesses that bring in about 9 billion euros in revenue.

Schneider Sales Growth

Schneider, the Rueil-Malmaison, France-based maker of electrical components, boosted sales by 24 percent in 2010, the most among Siemens’ rivals, and has spent almost $8 billion on deals since the start of 2009, data compiled by Bloomberg show.

Still, Siemens shares have gained 73 percent since the end of 2008 as the 83-member Bloomberg European Industrials Index gained 59 percent.

The company plans to fill holes in energy distribution, industry automation, building technology, and smart grid applications, Chief Financial Officer Joe Kaeser said on an April 5 conference call. The company said its focus is on innovation-driven markets, emerging economies and strengthening its services business.

“We have our list,” Loescher said on a May 17 conference call, adding that he knows “exactly where” strategic targets are and “who they are.”

Siemens’s Acquisitions

Acquisitions may be between 1 billion euros and 5 billion euros, Kaeser said last month. Siemens’s acquisitions have been 762 million euros on average at a median multiple of 12 times earnings before interest, taxes, depreciation and amortization, data compiled by Bloomberg show.

Spirax-Sarco of Cheltenham, England, may help Siemens get into energy services, said New Energy Finance’s Rowlands-Rees, who’s based in London and focuses on energy-efficiency companies. The maker of pressure controls and steam traps with a market value of 1.5 billion pounds (1.7 billion euros) generated 39 percent of sales in Europe, the Middle East and Africa and 22 percent in the Asia Pacific, data compiled by Bloomberg show. It trades at 10.6 times Ebitda.

“It’s a reasonable size,” said Greenwood’s Todd. “They have exposure to emerging markets, which is where everybody wants to be. Geographically that would make the most sense.”

Itron, with a market value of $2 billion, may be “an interesting smart-grid play” for Siemens, said Rowlands-Rees. The Liberty Lake, Washington-based company would add utility meters, communications equipment and electricity-management software as Siemens targets 7 billion euros in new orders for smart grids by 2014. Smart grids help regulate power use and manage fluctuations in supply from renewable energy sources.

Water Meters

Itron is valued at 7 times Ebitda, the cheapest of any U.S. maker of electronic measuring instruments greater than $500 million, data compiled by Bloomberg show.

“What makes Itron sexy in the long run are their water meters, which offer great potential in emerging regions of Asia and Africa where penetration of such products is low,” said Alexander Funk, who helps manage 500 million euros in Luxembourg for Oekoworld Lux SA, which specializes in environmentally friendly investments.

Siemens could also consider buying Watts Water Technologies Inc. (WTS), the $1.2 billion maker of filters and protection valves in North Andover, Massachusetts, Oekoworld’s Funk said. The company is valued at 7.6 times Ebitda. Chief Financial Officer William McCartney declined to comment.

“The enormous cash is burning holes in Siemens’s pockets,” said Thilo Mueller, who helps to manage 120 million euros at MB Fund Advisory GmbH in Limburg, Germany. “They need to make acquisitions. We are awaiting that. In the long run, no company can afford to hold that much cash.”

To contact the reporters on this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net; Rita Nazareth in New York at rnazareth@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Benedikt Kammel at bkammel@bloomberg.net.

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