Deals

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. CEO Dave Farr avoided a potential financial fiasco by calling off his pricey pursuit of Rockwell Automation Inc., but the reputational damage has already been done.

The maker of food-waste disposers and automation tools on Tuesday said it's withdrawing a proposal to acquire Rockwell for $225 a share in cash and stock. The announcement was largely a formality, seeing as the target company had rejected Emerson not once, not twice, but three times in recent months (the third coming last week). It was the right call to walk away: Adding more cash to the bid would have further burdened Emerson's balance sheet, but its stock was a poor currency that was only getting less valuable as investors questioned this takeover scheme.   

Damage Done
Emerson shares have recovered somewhat as the prospects for its Rockwell pursuit darkened, but the shares are still down about 8 percent on news of its interest.
Source: Bloomberg

So all's well that ends well, right? Not quite. Part of what jarred Emerson investors about this Rockwell chase was how much it varied from the would-be acquirer's professed takeover policy. During the company's third-quarter earnings call in August, Farr told investors he was looking at "incremental small deals" and wasn't going to "ramp up and do a big deal at this point in time." Maybe it's just me, but Rockwell, which has a market value of about $24 billion and would have represented by far Emerson's largest takeover, seems neither "incremental" nor "small."

Ok Then
Emerson CEO Dave Farr said in August he was looking at between $500 million and $1 billion of acquisitions over the next year and wasn't going to ramp up to do a big deal. Whatever.

CEOs are often misleading about M&A plans. Former Honeywell International Inc. CEO Dave Cote spent most of his career focusing on small, bolt-on targets no one had heard of, remarking in 2013 that $1 billion-plus transactions make him "queasy.” But then he made a $100 billion-plus offer to acquire United Technologies Corp. in 2016. It ultimately failed. Speaking of United Technologies, CEO Greg Hayes in May said "there's nothing huge in the pipeline" and that he was targeting deals in the $250 million to $1 billion range. Come August, he was pursuing Rockwell Collins Inc., and ultimately agreed to buy the avionics maker for $30 billion.

But those CEOs have earned more benefit of the doubt, especially Cote. The former Honeywell leader is a proven operating savant with a knack for driving margins higher. Investors forgave him for having eyes bigger than his stomach in the twilight of his tenure. As for Hayes, it's true that United Technologies'  Rockwell Collins deal is an expensive, complex bet, but he does have experience integrating pricey takeovers and achieving revenue benefits, as evidenced by its $18 billion purchase of Goodrich Corp. in 2012.

Farr is no Cote, even if they share a first name. Emerson's outsize exposure to the energy markets proved a liability as oil prices dropped, dragging down the company's sales and profits with them. And Farr is also no Greg Hayes. His biggest deals include the $1.5 billion purchase of back-up power equipment maker Chloride Group Plc, which resulted in a $508 million write-down a few years later and a hit to his bonus. The jury's still out on Emerson's $3.15 billion purchase of Pentair Plc's valves-and-controls business this year, which only increased its exposure to volatile energy markets.      

Back of the Pack
Emerson has underperformed relative to other big industrial companies
Source: Bloomberg

Farr tried to assuage investors on Emerson's earnings call earlier this month that the Rockwell bid wasn't an act of desperation. He said his company has a plan to create an integrated automation offering on its own through joint ventures and small purchases, even if it takes a while and is more complicated than a one-shot megadeal. I don't know that he did much to convince investors, or even himself. 

The fact that Emerson felt compelled to host a conference call on Tuesday morning to talk about its rejection and "standalone plan" is a sign it knows it has some explaining to do. That plan doesn't include a breakup, unfortunately, but it does include looking at General Electric Co. assets that could come up for sale. After all, nothing gets investors jazzed these days like the mention of GE. It wouldn't be altogether surprising for Emerson to soon have to explain itself to an activist investor.

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