Deals

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. and Emerson Electric Co. are still at odds with each other over a potential merger, but they're speaking the same strategic language.

The two industrial companies reported earnings back-to-back this week. Rockwell Automation's recent rejection of Emerson's $27 billion takeover bid added an element of intrigue to what were otherwise rather uninspiring numbers from each of them. Should a deal happen, it would merge Emerson's strength in process automation (think controls for the energy industry) with Rockwell's leading discrete automation offerings (assembly-line technologies).

Meh
Neither Rockwell nor Emerson impressed investors with their latest quarterly results
Source: Bloomberg
NOTE: Estimates for EPS are the average of analysts surveyed by Bloomberg. Rockwell organic growth estimate is from Cowen & Co.'s Joseph Giordano. Segment margin estimate is from Rob McCarthy of Stifel Financial Corp.

Here's Emerson CEO Dave Farr on the appeal of such a combination: "We would create an industry leader, better positioned in an environment where the global customer base is asking for a more integrated solution." Rockwell CEO Blake Moret, meanwhile, says Emerson's bid is less attractive than his company's own strategic plan, which is predicated on the idea that "having a single platform with a common software environment is something that customers tell us over and over brings them a lot of benefits." Can you spot the similarities?

There's some nuance here, of course. Rockwell has been successful at targeting a range of customers with its Logix control and information-management platform. Sales for Logix were up 8 percent organically in the fourth quarter, while revenue for its process operations climbed 9 percent. Process is still a smaller business for Rockwell, but it could conceivably be just fine on its own, whereas Emerson's plan B of filling in its discrete automation shortcomings with joint ventures and a series of smaller deals seems long-winded and less effective. Vertical Research analyst Jeff Sprague cites Rockwell management's concerns that integrating Emerson's offerings would be a tricky, expensive endeavor that could create disruptions for customers.

Trophy Asset
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

Rockwell's management is justified in questioning Emerson's ability to pull off a deal of this size and complexity, considering its past attempts at smaller M&A haven't exactly been success stories. But at the end of the day, the two companies are in general agreement about what's necessary to compete effectively in the industrial automation industry. Turning that similar thinking into an actual deal will come down to how much Emerson is willing to offer.

Farr indicated on his company's earnings call that there may be room for Emerson to raise its bid, noting its latest $215 stock-and-cash offer is a "full and fair price -- based on public data information that we see today." Translation: let me into the data room to do some due diligence and I'll be more comfortable paying a higher price. As of now, Emerson would be ill-advised to raise its offer. The current proposal is already dilutive to its EPS, and because its stock is a poor currency, the company would have to risk an even more swollen debt load by dangling additional cash at Rockwell holders. But if Emerson is foolish and grandiose enough to make an offer in the $230 range -- an area analysts think could get a deal done -- maybe Rockwell should take advantage.

Overhyped?
Even before news of Emerson's bid, Rockwell was trading above what analysts on average thought was reasonable
Source: Bloomberg

The company doesn't need Emerson, but Rockwell shares are priced for perfection and its latest results were anything but. Before Emerson showed up, only three of the 21 analysts tracked by Bloomberg that follow Rockwell recommended buying its shares. A $230 offer would be just a 23 percent premium to what Rockwell commanded before news of Emerson's approach, but a 32 percent premium relative to what analysts on average thought those shares would be worth a year from now.

There's something to be said for not looking a gift horse in the mouth.

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