Regular M&A Buzz

Emerson Electric includes a string of acquisitions - Rosemount, Fisher Controls, Intellution and several other industrial automation companies. Emerson continues to fuel its growth through acquisitions of companies and assets (part of Westinghouse, recently Daniel Industries and more coming).

Growth through acquisitions

Danaher includes Fluke, Namco, Partlow, Pacific Scientific - all relatively recent acquisitions. Notice their more attractive market-cap to sales ratio (about 2.5 to 1) and compare this with the others (all about 2:1, except Eaton which is about 1:1). Expect a big merger or acquisition from the Danaher direction, to boost their market-cap to the TYCO level. TYCO (Keystone, AMP and a host of others) simply indulges in merger-mania. With total sales not much more than Emerson and less than Honeywell + Allied Signal, Tyco's excellent acquisition follow-through implementation has raised their market-cap to heady levels - (market-cap to sales about 4.5 to 1).

The international group

My own affiliation is Invensys, the new name for the merger of British companies Siebe and BTR (BTR actually stands for British Tire & Rubber - of course, the British spell that Tyre). Both companies were themselves the result of combinations of Foxboro, Robertshaw, Wonderware, Eurotherm, Unitech, Hawker Siddeley and a host of others - there are now about 200 companies in the group. Invensys is now clearly one of the leaders in industrial automation. To increase their market-cap valuation, Invensys should be looking to go-public in US markets soon.

ABB (itself a combination of ASEA and Brown Boveri) bought Combustion Engineering , Taylor, Kent and most recently Elsag Bailey with and all its accumulated ingredients - Fisher & Porter, Hartmann & Braun and other adjuncts. ABB stock trades on the Zurich, Stockholm and Frankfurt exchanges, which does not yield an impressive market-cap to sales ratio.

Siemens bought the Programmable Controllers Division of Texas Instruments (remember?) and is still hunting for US market growth, so they tend to be a regular player in the bidding game. Siemens trades on German and other European exchanges, with a relatively low market-cap to sales ratio, because their profit expectation are somewhat lower than the others. But, with its sales size, look for Siemens to be landing a big catch before too long. Update : As I predicted, in early 2000 Siemens bought Moore Products, at $ 160m sales, probably the last of the $100m+ independents.

Schneider, already a combination of Telemechanique and April and Merlin-Gerin in France, bought Square-D and Modicon in the US and might still be a contender for further global gobbling, to help disguise their indigestion.

Yokogawa tried to work a joint venture with Johnson Controls but, as expected, that didn't work - the Japanese culture doesn't quite know how to handle acquisitions. And JVs seldom succeed. GE-Fanuc (a joint venture between GE and Fanuc) is an exception, achieved through a complicated formula of different ratios of ownership in the different major market areas - hence I have not estimated sales and market-cap valuation. GE-Fanuc recently bought Total Control Products, which was evidently worth more to GE-F than it was an as independent public company. Hold that thought…!

The $1b threshold

Then you have the two British mini-conglomerates : Bowthore and Fairey. They feel they have found the formula - keep buying up smaller companies (often as small as $ 5-15m) and run them well, to consolidate with healthy growth and profit. But, climbing the growth curve profitably is not easy and Fairey's market-cap has suffered. Bowthore has been moving its mix in the direction of the Telecom market and finds a better valuation in that direction.

Roxboro is a new UK-based entrant in this category - they bought Solarton from Schlumberger and are making other acquisitions, heading in the same direction. ICS Group (UK) is another - they bought MAX Control Systems from Leeds & Northrup (which itself was sold off piecemeal to Honeywell and others) and also Triplex and Transmitton. Their market-cap reflects losses and sales-volume shrinkage, which is just starting to turn around.

I am not aware of any US or other mini-conglomerates of this type - if anyone can point out examples, please let me know.

Slow growth = low market-cap

Back to the industrial controls business - take a look at the Industrial Controls Intelligence headlines each month and you'll see a regular sprinkling of acquisitions - Invensys buys Marcam Solutions, Emerson buys Daniel, Honeywell buys Data Instruments, Danaher buys Hach, Dynapro sells HMI business to Rockwell - the list continues endlessly. How and why does this make sense?

The reasons why

1/ Global Reach : Business today is global. Relatively small companies - even those at the $100-200m level - find it very tough to grow globally. Their best bet is to consolidate with a global player.

2/ Stock Valuations : The stock market values growth and profit. Profit without growth appears to be a melting iceberg, while growth without profit seems opportunistic. Changes in recent market valuations are driving management philosophy and strategic directions. Today's accepted idea is that once size is established (by whatever means) profit can be achieved by consolidation, down-sizing and divestiture. In this scenario, mid-cap "value" stocks have not fared well compared with the large-cap "growth" stocks. Hence, they are more valuable as part of a larger conglomerate.

Acquire or be acquired

Privately held companies like Opto-22 and Moore Industries are at a dead-end, with no continued growth prospects and a track-record too lackluster to ever go public. In today's global business environment, they are inevitably fuel and fodder for the market-cap of the conglomerates.