Industrials

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

Rockwell Automation Inc., the subject of perennial takeover speculation, now has a real, live suitor. Expect more to emerge.

The $26 billion maker of factory software and controls confirmed on Tuesday that Emerson Electric Co. had offered to acquire it for $215 a share, with the bid composed of 50 percent cash and the rest in stock. The price works out to about 22 times Rockwell Automation's trailing 12-month Ebitda, or about double the median multiple for big industrial takeovers over the last decade. The $27 billion proposal -- like the several before that Emerson has reportedly made -- was resoundingly rejected.

That's One Expensive Target
Rockwell Automation's high valuation has been the biggest deterrent to a takeover. Its strategic value has never been in question.
Source: Bloomberg

That kind of response isn't surprising. This is Rockwell Automation we're talking about -- it's among the few remaining big industrial companies with one general expertise. Most of the others have been acquired over the years and embedded into one conglomerate or another. That includes its sister company, Rockwell Collins Inc., which agreed to sell itself this year to United Technologies Corp. As a direct beneficiary of the push to make factories and equipment run more efficiently, Rockwell Automation has only gotten more attractive for industrial buyers trying to adapt their businesses to the digital world . Given all that, it can honestly name its price.

Emerson was never going to waltz in with a sub-20 percent percent premium and be able to walk away with a deal. True, Rockwell Automation shares had already surged 39 percent so far this year before Tuesday's pop, and analysts on the whole saw the stock as overvalued. But logic tends to go out the window when the target in question is a trophy asset that's likely to spark a bidding war. While Rockwell Automation has arguably been "in play" for years, Emerson has just fired the starting gun of what's sure to be a competitive race.

No Limit
Rockwell Automation had surged past analysts' average estimate of a reasonable valuation even before the shares spiked on news of Emerson's bid
Source: Bloomberg

Perhaps the most logical alternative suitor is Honeywell International Inc. The company agreed earlier this month to spin off its turbochargers and consumer-facing home technologies businesses amid pressure from activist investor Third Point LLC. The simplification was smart and allowed Honeywell to offload legacy liabilities, but the announcement hasn't done much to boost the company's valuation. What could make a difference is meaningful M&A. A takeover of Rockwell Automation would align with CEO Darius Adamczyk's effort to increase Honeywell's software-related revenue, while also offering more in the way of traditional cost synergies than some of the company's more recent acquisitions of smaller start-ups.

While vowing to be "active" on M&A, Adamczyk has also pledged to remain disciplined on price. There is nothing disciplined about Rockwell Automation's valuation. But it's worth remembering that United Technologies' CEO Greg Hayes also vowed to stay disciplined on M&A valuations right up until he lobbed in a pricey $30 billion bid for Rockwell Collins. So you never know.

Industrial Prize
Rockwell Automation has one of the best returns on invested capital among its peers
Source: Bloomberg
NOTE: Basket of industrial companies excludes aerospace and defense manufactures as well as transportation and logistics companies

I think we can definitively rule out General Electric Co. for any big M&A for a while. But Schneider Electric SE could be interested, as could Siemens AG. Swiss company ABB Ltd. reportedly considered a takeover of Rockwell Automation earlier this year and opted instead for a smaller model in Bernecker & Rainer Industrie-Elektronik GmbH. With Rockwell Automation now drawing concrete bids, however, ABB is likely to at least take a second look.

There could well be two Rockwell companies sold this year. 

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

  1. After accounting for net cash.

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

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net