Emerson Electric Jump Starts Itself
There's just no pleasing some people, especially on Wall Street. That thought undoubtedly ran through Charles F. Knight's mind earlier this year. The chairman and CEO of Emerson Electric Co. had just led the St. Louis-based electrical components manufacturer to a remarkable 42nd consecutive year of increased earnings. But instead of taking bows, Knight, one of the more celebrated CEOs in America, was taking shots over the company's plunging stock. By mid-March, Emerson shares, hit by a downdraft among electrical equipment makers, had fallen 33% in three months, to just over $40. That marked their lowest price in three years. Earnings or no earnings, shareholders grumbled, Emerson is still just a slow-growth, stodgy old company.
But with Emerson pushing into a lucrative new business, the complaints appear to be quieting down. In January, Emerson completed its $980 million buyout of Jordan Industries Inc.'s telecommunications-products business. Then in April, Emerson announced it had sealed a $725 million deal to buy the power-supply division of Swedish phone maker Ericsson. That, combined with a rebound in Old Economy stocks, was just what Wall Street had been waiting for. Emerson's stock has since jumped more than 50%, to around $63.
Investors' change of heart toward Emerson is easy to understand. Better known for selling electric motors, refrigeration components, and industrial tools, the 110-year-old company now looks to be positioning itself to cash in on the booming demand for reliable backup power systems for computer networks. With the country's power grid quickly reaching its capacity, outages are now almost commonplace. And when the power goes out, Emerson components kick in, switching the power from one source to another and regulating voltage. Emerson also provides diesel generators and fuel cells that generate temporary electricity.
Those products have become must-buys for any corporation that uses the Internet for conducting business. "The potential for Emerson is huge," says Edward Whitacre, Chairman and CEO of SBC Communications and an Emerson board member. That's why the acquisitions should help Emerson boost sales by $4 billion in fiscal 2000, to an estimated $15.4 billion, making the power unit the largest and fastest-growing of Emerson's five business units. And with its robust 15% margins, it's also among the company's most profitable. The unit should deliver nearly 20% of Emerson's $2.5 billion operating profits in 2000, up from 12% in 1999, according to Prudential Securities analyst Nicholas P. Heymann.
SECOND-GUESSING. Now, however, some worry Knight may be taking his acquisition strategy too far. He has made no secret of eyeing the power-systems business of Lucent Technologies Inc. The business, which accounts for 3% of Lucent's $38 billion in annual revenue, could go for as much as $3 billion. But that may be more than Knight should take on, some investors and analysts warn. Although long-term debt is virtually unchanged since last September, at about $1.4 billion, analysts say Knight should be careful about overspending. The deals have been financed with commercial paper and short-term borrowing from institutional investors. "They need to watch the debt and focus more on integrating their other acquisitions," says Heymann. But Knight isn't worried. "We'll be a contender for Lucent," he says.
Still, Knight doesn't have much room for missteps. While the telecommunications and electronics unit may be booming, Emerson still has to contend with its slower-growth divisions. Sales have been flat or in the single digits at all of its other businesses, including the company's heating, air conditioning, and industrial automation units.
POWERFUL NEED. That's why the seemingly mundane service of providing backup power is so critical to Emerson. Such backup systems are the only way to ensure complete reliability for businesses that depend on a seamless link to the Internet. But such reliability is virtually impossible to guarantee with most existing power grids, and many companies must turn to backup power systems to complement the power supplied by utilities.
Emerson is betting big on that demand for its future sales growth. "This is one area where double-digit growth rates are almost guaranteed, regardless of the economy," says Edward Jones analyst Matt Collins. Emerson is estimating that the high-tech power-systems businesses it acquired will grow at 15% to 20% per year. "It's an important growth market, as far as we're concerned," says Richard G. Luedke, a spokesman for State Farm Mutual Automobile Insurance Co., which owns more than 2.6 million Emerson shares.
Indeed, the need for reliability is bringing in customers such as Cisco, WorldCom, and Intel. E-business Web-hosting company Intira Corp. has been using Emerson power-supply systems for backup since 1998. The systems have proved crucial as Intira has dealt with blackouts and other outages. In June, the utility company servicing Intira's data center in St. Louis suffered a seven-hour outage due to a malfunctioning transformer. Emerson's backup kept Intira's Web servers online. "All of our affected customers would have gotten a month of free service if we had gone down, costing us hundreds of thousands of dollars," says John R. Steensen, Intira Corp.'s chief technology officer.
Helping to power up the New Economy is no doubt giving Emerson a big boost. But will it be enough? Knight will also need to come up with a strategy for the rest of his business if he wants to keep that 42-year earnings streak alive. Figuring out how to do that may prove to be Emerson's biggest power play yet.