Emerson's $28 Billion Rockwell Automation M&A Defeat Turns Sweet

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(Bloomberg) -- Emerson Electric Co. couldn't buy Rockwell Automation Inc., so now it's building a look-alike. It's a strategy that just might work.

The industrial conglomerate on Thursday said it's paying 527 million euros ($622 million) to acquire German-based Aventics, which makes compressed-air technologies that power automation equipment. Importantly, Aventics's products largely cater to so-called discrete manufacturing, or the production of distinct items like cars on a factory assembly line. This fills a relative gap for Emerson, which is focused more on software and equipment for products that come in batches, such as chemicals and oil derivatives. This is the same gap Emerson tried to close with its failed $28 billion pursuit of Rockwell Automation last year.

Obviously, Aventics, which generates less than 10 percent the revenue of Rockwell, doesn't represent the same kind of quantum leap that the larger takeover would have. But the deal crystallizes Emerson CEO Dave Farr's backup plan of using joint ventures and smaller deals to build the kind of one-stop automation technology shop he says customers are looking for. At the time, I thought that approach would be less effective and too time-intensive. Now, I'm starting to be convinced it's the better route.

Sure, it will take longer, but Emerson doesn't have the best track record with large deals, and investors tend to turn a skeptical eye toward any large outlay it makes. Emerson has, however, had success integrating smaller purchases and building a business piece by piece. As Farr has pointed out, Emerson grew what was a relatively minor process-automation business in the 1990s to the multi-billion behemoth it is today without a massive deal. The biggest public purchase the company made in this arena is the $3.2 billion takeover of Pentair Plc's valves and controls unit, and that was completed last year after the automation business was well-established.

Also, and importantly for investors, Emerson may be able to lock in these smaller purchases at a less eye-watering valuation than what it offered for Rockwell. Emerson is valuing Aventics at about 1.5 times the $425 million in revenue it says the business generated last year, a meaningful discount to the roughly 3 times sales that ABB Ltd. paid for Austrian automation-company Bernecker & Rainer Industrie-Elektronik GmbH last year in another bid to find a Rockwell replacement. Emerson is paying about 12 times Aventics' estimated 2018 Ebitda, compared with the roughly 15 times forward Ebitda Rockwell currently commands before accounting for a premium.

Emerson sees an opportunity for margin expansion at Aventics as it brings profitability in line with its own automation operations. It will have to execute on that goal, but for now, investors like what they see. Emerson's aggressive pursuit of Rockwell looked at the time like a desperate bid to cement a somewhat nebulous legacy for Farr and an acknowledgment of weakness in its product portfolio. But since it walked away, Emerson shares are up about 18 percent while Rockwell has slipped 5 percent. The difference is that Emerson has a plan B that's now bearing fruit, whereas Rockwell's strategy for creating on its own the kind of value Emerson was offering is murky.

Sometimes defeat is sweeter than victory.   

©2018 Bloomberg L.P.

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