In spinning off the network power unit, Emerson Electric Co. is cutting ties to a business that Dave Farr built since becoming chief executive officer in 2000.
It turned out to be a drag on the company.
Emerson spent about $3.8 billion in acquisitions to bulk up the division, which provides equipment for data centers used by banks and Internet companies such as Facebook Inc. Stockholders now will get shares in a business that is Emerson’s least profitable and has resulted in asset write downs.
“I created a unique, new space called network power,” Farr, 60, said on a conference call Tuesday to explain Emerson’s strategy shift. “It’s not been one of my better approaches in life, and I wouldn’t say I would put that on my tombstone to say that was a strong accomplishment.”
Emerson has also put under review businesses that include storage, motors and drives and power generation, part of a plan to boost earnings while slimming the size of the St. Louis-based company. Subtracting those operations would leave Emerson with revenue of $16.3 billion, down from $24.5 billion in 2014, according to a slide presentation.
On a pro forma basis, profit margins for Emerson would rise to 19.7 percent from 16.5 percent, according to the presentation.
Emerson fell 0.2 percent to $55.43 at the close in New York. It was the stock’s sixth consecutive drop, the longest streak since September 2012, according to data compiled by Bloomberg, and left the shares down 10 percent this year.
Investors will be glad to see network power go, said Brian Langenberg, an independent analyst who founded Langenberg & Co. “They tried to bulk it up to fix it and give it some heft. It didn’t work. So, flushed. It’s out.”
He said Emerson will be able to concentrate on growing the process management business and commercial and residential unit, which sells air conditioner compressors, food-waste disposals and shop vacuums.
Profit at the network power unit slumped 20 percent in 2014 amid weak demand from financial customers and technological changes requiring rapid product upgrades, and Emerson told analysts in May that it was weighing options for the operations. The company opted for a spinoff after it ran into trouble selling part of the division in 2013, which resulted in a charge and with Emerson retaining a stake in the business.
“We view this as positive news,” said Barbara Noverini, an analyst at Morningstar Inc. “In recent years, Emerson’s Network Power business required a lot of time and talent to compete in a market that has only grown more challenging.”
The separation won’t require approval from shareholders, Emerson said, projecting that the company’s various transactions would be completed by Sept. 30, 2016. Farr said Emerson would receive cash from the spinoff, which “we will leverage up.” Emerson didn’t announce a name for the new business.
The smaller, but more profitable, company now looks cheap compared with peers, Langenberg said. With the remaining businesses, Emerson will be able to recapture investors’ confidence, he said.
“They are very good at engineering. They are very good at grinding out results,” Langenberg said. “This will allow them to go to verticals that have been ignored.”
In shedding the operation now, Farr is coming in at the tail end of a spinoff boom, with the number of deals dropping after reaching a peak in the last quarter of 2014.
Emerson’s sales fell 1 percent last year and are predicted to decline again in 2015, according to analysts’ estimates compiled by Bloomberg.
The network power unit is Emerson’s second-biggest by sales, behind the process management business that provides controls and software to oil producers. That operation has been crimped by slumping global crude prices.