Deals

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Komatsu seems to understand the concept of "buy low" a little better than its U.S. rival Caterpillar.

The Japanese dump-truck maker on Thursday announced it's acquiring Joy Global for $28.30 a share, or more than $3.6 billion including current net debt. Komatsu isn't swooping in at the cheapest price -- Joy had fallen below $9 at the start of the year as the commodities slump eroded demand for its mining shovels and draglines. But it's still getting Joy at almost a 50 percent discount to its five-year average. And now it has the benefit of at least some stabilization in commodity prices to give it confidence in a mining turnaround.

On the Cheap
Joy Global shares have recovered somewhat this year, but Komatsu is still getting a bargain.
Source: Bloomberg

In other words, the timing probably couldn't have been better for Komatsu to strike its biggest deal yet. And that makes Caterpillar's already rather silly-looking purchase of mining equipment maker Bucyrus International -- its biggest deal ever at $8.6 billion including debt -- look even sillier.

Caterpillar bought Bucyrus in 2011, at just about the peak for the mining industry. It paid more than 15 times Bucyrus's trailing 12-month Ebitda, in one of the more expensive deals of its kind. Komatsu, in contrast, is paying about 13 times Joy's projected Ebitda for this year, once you adjust net debt for the free cash flow the company is expected to generate and the money it will make from divestitures, according to Bloomberg Intelligence analyst Joel Levington.

While Caterpillar and other rivals struck large deals, Komatsu pursued smaller takeovers and partnerships, including a joint venture with General Electric's mining arm. Here's what a senior executive said about the company's strategy in 2014:

“Rather than spending a huge amount of money to take over existing products, we’ve decided to create new value through our own efforts."

Burn. Komatsu has not been immune to the mining slump, but at least it hasn't added to its worries by burning a bunch of money on deals.

Meanwhile, sales at Caterpillar's resource industries division -- which includes assets acquired from Bucyrus and the $790 million takeover of ERA Mining Machinery in 2012 -- have been cut in half in the intervening years, as mining customers facing a glut of metals and coal left equipment idling and shut down projects. Caterpillar later announced a $580 million writedown related to the ERA acquisition, representing roughly three-quarters of the purchase price, saying it had discovered accounting misconduct.

The $47 billion company has faced repeated questions from analysts about whether further impairment charges will be necessary in relation to the Bucyrus acquisition. Goodwill -- the difference between what a company pays to buy a business and the estimated value of its assets -- has remained above $6 billion since Caterpillar made the purchase. The SEC is continuing to investigate how the company accounts for that.

Caterpillar has said its business is highly cyclical and that its accounting is based on a longer-term view. To its point, Komatsu's purchase of Joy Global does signal it sees a turnaround within reach for the mining industry.

But it's still hard to see how Caterpillar avoids taking writedowns on the Bucyrus purchase when Ebitda has eroded from roughly $645 million in 2010 to just $1 million of operating income for the whole of Caterpillar's resource industries division last year.  Either way, Caterpillar definitely bought at the peak and rode it down to the trough. For what it's worth, Joy Global earned more in Ebitda than Bucyrus did in its fiscal 2010.

Donald Trump, the Republican presidential candidate, has repeatedly cited Komatsu as an example of foreign companies "beating" American counterparts. Komatsu may be beating Caterpillar as far as acquisition strategy goes, but Caterpillar's missteps are of its own making.

--With assistance from Tara Lachapelle 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Value is as of announcement. 

  2. Caterpillar said in its most recent quarterly filing that the investigation was "ongoing," but it didn't expect the matter to have a "material adverse effect" on its results, financial position or liquidity. 

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net