Emerson Should Know When to Fold
It's over, Emerson.
The industrial company has now been rejected three times by its desired target, Rockwell Automation Inc. The maker of assembly-line controls on Wednesday said Emerson Electric Co.'s latest $225-a-share cash-and-stock bid undervalues it. It's telling that Emerson shares rose on this news: Investors are hoping it will finally give up this harebrained scheme. Strategically, Rockwell is attractive for Emerson because it would complement the company's existing automation technologies and give it a leg up in the push to digitize industrial equipment. But the takeover has never made much financial sense. Emerson just doesn't have the firepower to pull it off.
Rockwell knows this. In its lengthy letter rejecting the bid, Rockwell CEO Blake Moret systemically picked apart Emerson's weaknesses, making clear there was little the suitor could do to make its offer attractive enough to get a deal done.
Before its interest in Rockwell became public, Emerson's total shareholder return was about a third of its target's over the past five years, making a stock swap undesirable. But adding more cash to its bid is also tricky. Moody's Investors Service estimates the current proposal implies leverage of five times the combined company's Ebitda. That's more than double the median for major North American industrial companies. Emerson can't rely on synergies to support a higher proposal because the calculations underlying its latest bid were already quixotic.
Because of all of that, I just don't see how Emerson can possibly justify to shareholders a sweetening of its already very expensive Rockwell takeover proposal. Emerson CEO Dave Farr will have enough to do in explaining why he even contemplated this deal in the first place. His attempts to cast the Rockwell bid as anything but a Hail Mary pass to save his legacy have fallen rather flat.
This doesn't leave Rockwell in the clear. Just as Farr will have to explain where Emerson goes from here (might we suggest a breakup?), the onus will also be on Rockwell to prove that it actually does "have the talent, the technology, the culture and the resources necessary to continue raising the bar." After the company's impressive run, Rockwell management has earned the benefit of the doubt, for now. But as Stifel Financial Corp. analyst Rob McCarthy notes, investors won't forget that the company rejected a $225-a-share bid if demand for its products declines and its stock withers.
Once the M&A ball gets rolling, it changes investors' perception of companies, for better or for worse.
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