Industrials

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

Emerson Electric Co. is better off transforming itself with a breakup than overreaching with a $27 billion bid for a competitor.

The $41 billion maker of automation and processing technology made a series of offers for Rockwell Automation Inc., eventually working itself up to a cash-and-stock bid this month of about $215 a share. That proposal -- a mere 15 percent premium to Rockwell Automation's unaffected price on Monday -- was deservedly rejected. Now that Emerson's bid is public, it opens the door for other suitors to step in. Emerson itself is unlikely to emerge victorious in any bidding war that ensues.

Middle of the Pack
Emerson has focused on keeping costs down, but it's not revered in the same way as top operators like Honeywell or Illinois Tool Works
Source: Bloomberg

Under the terms of the latest offer, a Rockwell Automation takeover would be dilutive to Emerson's earnings before accounting for any synergies, according to data compiled by Bloomberg. Emerson's shares have returned about one-fifth of what Rockwell Automation has over the past five years, so that's a pretty poor currency from the perspective of the target company's shareholders. Putting in more cash would make the debt load untenable, and cost savings probably wouldn't be sufficient enough to make the math work on a meaningfully higher offer, anyway.

So the question is, why did Emerson try not once, but several times to bid on a company that it was unlikely to be able to buy?

Emerson is no General Electric Co. -- thankfully for its shareholders. But CEO David Farr does have some similarities with GE's former CEO Jeff Immelt. Both had to fill the shoes of well-respected predecessors, and enjoyed long tenures marred by criticism of their capital-allocation decisions. Immelt was in the top post for about 16 years; Farr has been CEO of Emerson for 17 years and counting. Given Immelt's fall from grace, it's understandable that Farr might be evaluating the state of his own legacy. An acquisition of Rockwell Automation, a target Farr has reportedly eyed for years, might have had a nice ring to it.

Why Now?
Rockwell has only gotten more expensive for Emerson
Source: Bloomberg

From a strategic perspective, there's loads of appeal. A deal for Rockwell Automation would expand Emerson into discrete automation and less-volatile industries such as packaged food, a shift that investors have long hoped for. But it's a too big, too late type of situation given how much Rockwell Automation's valuation has climbed relative to Emerson's. If Farr was going to do this takeover, he should have done it a lot earlier -- arguably instead of the deals he did do, the biggest of which could hardly be termed success stories.

Emerson acquired backup-power equipment maker Chloride Group Plc for about $1.5 billion in 2010. The deal resulted in a $508 million charge a few years later, a concurrent hit to Farr's bonus and eventually an admission of defeat with a sale of the network-power unit these operations helped comprise. Emerson then bought Pentair Plc's valves-and-controls business for $3.15 billion, adding to what was already an outsize exposure to energy that's eroded its profit over the past few years. 

By the Pieces
Emerson's commercial-and-residential solutions unit has higher margins and is more stable than its energy-exposed automation-solutions division
Source: Bloomberg

This last deal, along with a bevy of divestitures, allowed Farr to reshape the company into two primary divisions, a reorganization that was interpreted by some as a potential prelude to a breakup. Emerson's automation-solutions division encompasses the Pentair valves-and-controls assets  as well as other processing and instrumentation technology, while its commercial-and-residential solutions unit is in the more stable business of selling climate technologies, food-waste disposals and do-it-yourself tools. I've pondered before whether the latter unit would benefit from being separated from the more energy-focused operations.

Perhaps Emerson should go back to Plan Breakup and leave Rockwell Automation for someone else.

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

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