Whither Rockwell Automation ?

For the six months ended March 31, 01, revenues fell 1% to $2.29 billion. Net income from continuing operations fell 26% to $140 million, with results reflecting "a slowdown in the economy, and increased interest expenses."

With the spin-off of Collins (the avionics business), Rockwell Automation is essentially Allen-Bradley and Reliance and a few extra pieces. Revenues will be $ 6b less $ 2.9b Collins = $3.1b. I asked some senior Rockwell Automation insiders for their "deep throat" comments, and this is what I received:

1. With the spin-off of Collins, why does Rockwell need a corporate staff that was given long term contracts when they moved from California to Wisconsin? Meantime, our contacts at Collins report that rumors are flying about a 10% layoff across the board.
2. Don Davis likes "running" AB again, but he is so out of touch that he is not even close to the same Don Davis he once was. At 61, some feel that he is ready to make a move towards the exit pretty soon.
3. Regarding the move to "Services”: Don has always said: "Show me a service business that has predictable revenues and gross margins, and I'll show you a service business I like." His heart (wallet) is still firmly that of a hardware gross-margin man. But, the truth about the products business is coming home to roost - declining margins and tough market conditions.
4. Most Allen Bradley & Reliance customers - Systems Integrators, Distributors - are scared to death about the competitive move on to their turf.
5. The emphasis on systems and services is driven by survival - and the consultants. There is a fight going on internally amongst the 3 business units as to who will be investing - or rather, cutting - less. So far, Ron Wichter, Senior VP Software & Services Group (ex DEC) seems to be winning. Several people report that he is "rattling lots of cages" right now. The new service culture needs lots of time (which they don't have) to be embedded in our core business method. It will need vision and determination to see it through.
6. The real market value of ROK = AB+REL will be known when Collins starts trading (end of June ’01). That could cause an interesting price dip for ROK and make an acquisition more realistic. Rockwell Automation is ripe for acquisition by any global automation company which believes that the installed base, plus distribution, would be an asset. Siemens seems to be ready and waiting.

"People keep talking about how we don't have a recession going on and, as measured by GDP, that may be the case," Chairman & CEO Don Davis told analysts in a conference call. "But I'll tell you one damn thing: That does not apply to the manufacturing sector of this economy." Frankly, he seemed rattled. In announcing the layoffs, he did not mention any pay cuts for himself (his salary is $ 2.2m) or the other highly paid executives who must take responsibility for the debacle.

The truth is that Rockwell is in a world of hurt, and losing market share big time in all segments of the industrial automation market. PLC's are being replaced by more powerful, easier to apply and more operator friendly scalable DCS applications. For Rockwell this reality is compounded by the fact that the discrete manufacturing and I/O market price levels are being driven down by the Europeans, Schneider and Siemens, who seem to be running a give-away contest!

On the New York Stock Exchange, Rockwell International stock ended the week at $41.60 - a drop of about 15%. Is Siemens tuned in? You bet!

Rockwell International became Rockwell Automation, a stand-alone $4.3 billion company focused on industrial automation, continuing trading with the ticker symbol: ROK. Rockwell Collins, the aviation electronics and communications part of Rockwell, began trading on the New York Stock Exchange as a separate entity with the ticker symbol: COL. When trading opened on Monday 2 July 2001, both stocks remained about even at their new post-split pricing.

With sales of $4.3b, Rockwell Automation now has a market-cap of $2.7b; while Collins with revenue of $2.61b has a market-cap is $ 4.26b. Interesting split, showing relative valuations that the stock market places on Automation and Avionics.

Don Davis continues as CEO of Rockwell Automation. Keith Nosbusch continues as president of the Control Systems operating unit of Rockwell Automation, including its Allen-Bradley, Rockwell Software, and Global Manufacturing Solutions brands. Joe Swann continues as president of the Power Systems operating unit and its Dodge and Reliance Electric brands. Rockwell Automation will also include Rockwell Electronic Commerce, which will continue to be led by Terry Murphy as president.

Rumors have been floating around recently that Eaton (ETN - sales $ 8b, market-cap $ 5b) is in talks with Rockwell Automation about a merger. Both companies have presence in Milwaukee and Cleveland, so it'd be a good fit, and a good "out" for Don Davis. Stay tuned...

A "deep throat" source from Milwaukee (ROK HQ) reported uncomfortably that $300,000 is being spent on a golf trip for the Chairman and family of "said corporation", together with other families and "guests" to attend the Ryder-cup golf tournament in the UK. After the recent major cutbacks and layoffs, this seemed like "an obscenity". But then, further probing elicited the response that "it was already budgeted for in last years plans" and "the money has already been spent". Hmmmm....

Over this past weekend, two senior people in Rockwell Automation UK quit to join ABB. Is this in response to the Ryder-cup fiasco? Perhaps.... We'd welcome comment from Don Davis, or someone (anyone) from Milwaukee.

"I am the currently the Sales Director for Rockwell Automation UK. I have been an avid reader of your newsletter each month since I arrived in the UK.

"I know you want your letter to be accurate. So let me comment on 2 areas, which you reported on (eNews No. 50-July 3, 2001) that were inaccurate and misleading.

"Inaccuracy #1: 2 senior people left the Rockwell Automation UK organisation to join ABB.

"The Facts: No senior people left Rockwell Automation to join ABB. One Sales Manager did leave us to join ABB - no other people left the organisation to join ABB."

Joe Lupone continues:

"Inaccuracy #2: $300k is being spent to send Don Davis, senior executives and their families to the Ryder Cup.

"The Facts: Rockwell Automation participation in the Ryder Cup is solely for the purpose of building business relationships with customers. The families of Rockwell Automation Senior Executives are not attending the Ryder Cup. 70% of the attendees paid for by Rockwell Automation are UK customers -the rest are local UK Rockwell Automation employees and 2 Senior Executives. By the way, our total cost for participation in this event, executive travel and all is less than half of what you quoted (Maybe the strength of the dollar!). And you are right that, except for travel, everything was paid for in last year's budget.

"My compliments to you on an insightful newsletter & thank you for clarifying the mis-information from eNews No. 50."

Major top-level management changes are expected over the next few months, as Rockwell positions itself to be acquired in the coming year. Meanwhile, to boost the acquisition price and show increased short-term earnings, more layoffs are expected in January 2002. Mercifully, the company seems to have the heart to NOT wield the axe before the holiday season. However, this short respite is not comforting to many who wait with trepidation.

Chairman & CEO Don Davis says it was the toughest year he has ever seen in his 39 years with the company (he joined in '63, as a sales-trainee). He seems to boast (perhaps to show that he can be tough) that he has "consolidated and closed facilities, realigned administrative functions and reduced the worldwide workforce by 9%". He pushes PLC leadership into the past (the '80's) and singles out Global Manufacturing Solutions as having had significant investment, claiming that Rockwell today is at the forefront of the movement to integrated services and solutions.

While he claims that he has spent "a lot of time talking with customers over the past year" - close associates suggest that Don Davis hardly ever leaves his "ivory tower" and speaks only with his "kissing cousins".

Control Systems generated 80% of revenue; Power Systems about 16%. With about 3% of the total, no one at Rockwell quite seems to know what Electronic Commerce is doing, though Don Davis suggests that it is "well positioned to meet the current and future needs of customers".

At a recent (Sept.'01) meeting of all employees in Mayfield, OH (Control Systems HQ) Sr. VP Steve Eisenbrown bravely invited questions from anyone in the audience. He was asked, "Will Rockwell be sold?" Steve, probably unprepared for this directness, responded spontaneously that the company would be sold within one year, and indeed that all existing management would be "swept away" by the new ownership. One wonders if anyone reported Steve's response to his boss, Keith Nosbusch, or Don Davis at the clock tower in Milwaukee...

At age 61, with no clear successor, Don Davis is tired and ready to sell Rockwell Automation. Here is the explanation of the "one year" - the split into Rockwell Automation and Collins earlier this year included a tax provision that, if anyone buys one of the pieces on or before 1 January 2003, they would be assessed an additional $ 1b. So, while the process is already under way, we can expect acquisition to occur only after that date.

Meantime, to maximize profits and increase the stock price, (and raise the eventual acquisition price) Don Davis is doing little else than cutting expenses. It is interesting that he did not receive a pay increase this year, from $900,000 (plus $34,053 other income), though he did receive an additional 330,000 stock options. Control Systems chief, Keith Nosbusch did get a pay raise from $ 350,000 to $410,000 (plus $37,397 other) plus 120,000 options. Not too bad, for doing some RIFs.

Remember the RIF rules? RIF#1 - liposuction; RIF#2 - amputation; RIF#3 - dismemberment. In my view, Rockwell has already engaged in RIF#2, and hopefully will not proceed to RIF#3 before the company is sold. Indeed, that would reduce the value!

Who will acquire? Only one of the majors can afford a purchase of this size. Invensys is already being sold; Honeywell/Allied and ABB are too busy with their own problems; Siemens (perhaps), Emerson (may be), Tyco or GE (possibly), Groupe Schneider (who knows?), Mitsubishi or Omron (never, the Japanese don't know how to acquire), Eaton or Danaher (if they are brave, or stupid enough). Perhaps Warren Buffet?