Emerson Loses Discipline in Higher Rockwell Bid
(Bloomberg Gadfly) -- So much for Emerson Electric Co. remaining "disciplined" on price when it comes to Rockwell Automation Inc.
Emerson upped its offer for the maker of assembly-line controls and software on Thursday to $225 a share, just over a week after CEO Dave Farr tried to soothe investors jolted by his previous pricey proposal of $215. Emerson also increased the percentage that would be paid in cash to about 60 percent from 50 percent, in an apparent recognition that its underperforming stock is a poor currency for holders of Rockwell's high-flying shares. We're increasingly approaching the point at which Rockwell has to take Emerson's interest seriously, but that also means we're entering valuation crazy-town.
What in the world is Emerson thinking? If Farr actually managed to convince anyone on Emerson's earnings call this month that he's not pursuing Rockwell out of desperation and has a plan B, this raised bid has suggested otherwise. Emerson's revised $225-a-share proposal values Rockwell at about $28 billion after subtracting net cash. That is nearly 24 times its trailing 12 month Ebitda -- more than double the median paid for large industrial deals over the past decade. At that level, Rockwell would be commanding its highest multiple on an Ebitda basis since at least the 1990s, no small feat given the company's dizzying climb.
Emerson already appears to be grasping at straws to justify an offer at this price. It cites $6 billion in synergies, but that is a capitalized number and not necessarily comparable to what's typically cited in M&A press releases. Rockwell, after all, had about $6.3 billion in total revenue last year. Cowen & Co. analyst Gautam Khanna says Emerson's calculation implies $400 million of after-tax synergies. Furthermore, one third of Emerson's synergy target is tied to revenue benefits, which are always a bit murky and harder to prove than cost savings from job cuts and consolidation of facilities.
Emerson's proclamation that a deal would be accretive to adjusted EPS in the first year after closing includes a curious footnote that says this estimate is exclusive of "repatriation taxes." That implies Emerson is looking to bring back some overseas cash to pay for the deal, a prospect that would be much less attractive should Republicans fail to pass a tax plan lowering the levies involved in returning offshore earnings.
This doesn’t seem to be the crux of the Rockwell proposal, but if it was me, I wouldn't want any part of by far the biggest transaction I've ever attempted tied to the ability of congressional Republicans to pass a bill. As a side note, you have to appreciate the irony of a manufacturing company using a cash repatriation plan President Donald Trump has heralded as key to resuscitating American investment to pursue a deal that will inevitably result in lost jobs, given those synergy numbers.
Rockwell will have to decide whether it wants to take advantage of Emerson's gluttony or continue to stick it out alone. Emerson shareholders have already voted on this deal by heading for the exits.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Brooke Sutherland is a Bloomberg Gadfly columnist covering deals and industrial companies. She previously wrote an M&A column for Bloomberg News.
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