The Urge to Merge

By : Jim Pinto,
San Diego, CA.

This article deals primarily with the industrial automation business. It discusses the reasons why a steady stream of mergers and acquisitions are occurring, leaving few mid-size independents.

The original version of this article was published in Industrial Controls Intelligence, September '99 - and quoted in several journals and newsletters in USA and Europe. This is the complete text, with updates and additions to the "famous list" of industry rankings based on size and market-cap.

Updated : 31 March 2000

There are a lot of mergers & acquisitions going on these days. It is useful to understand the big picture behind all these business combinations.

Let's take a look at some of the M&A activity over the past couple of years. To make my point, I have included a table showing the annual sales and market-cap (total number of shares outstanding x recent stock price) for most major industrial automation leaders.

Annual SalesMarket-Cap
Siemens$ 65b$ 35b
ABB$ 31b$ 31b
Honeywell + Allied$ 23b$ 51b
Tyco International$ 17b$ 78b
Invensys$ 14b$ 21b
Emerson Electric$ 14b$ 27b
Schneider Electric$ 8b$ 8.5b
Rockwell$ 7b$ 11b
Eaton$ 7b$ 7b
Danaher$ 3b$ 7.5b
Yokogawa$ 2.3b$ 1.6b
Bowthorpe (UK)$ 0.94b$ 1.9b
Ametek$ 0.925b$ 0.6b
Fairey (UK)$ 420m$ 632m
Roxboro (UK)$ 182m$ 225m
Moore Products$ 168m$ 59m
Woodhead$ 147m$ 126m
ICS Group (UK)$ 110m$ 70m
MTL (UK)$ 75m$ 80m
Transmation$ 70m$ 18m
Note : Most numbers are FY98, and YTD 99 - as of Sept. 99

Regular M&A Buzz

Just recently, Allied Signal and Honeywell combined two relatively fragmented businesses into one (hopefully) stronger entity. It is interesting to note that one cannot value Honeywell's industrial controls segments (sales $2b) separately - it is lumped into the total. Indeed, Honeywell might well sell off its Industrial Automation Controls Division because it is not necessarily a good fit with the rest of their businesses and may be better off (read worth more) as part of someone else's primary focus. (Hey! Is that why Markos Tambakeras left so suddenly before the merger was announced?)

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

In a previous discussion, I brought up Rockwell, which owns Allen-Bradley. A-B cannot be valued separately, except if it is sold off to someone else. After my last article, someone brought up the possibility that Eaton (which includes Cutler-Hammer) should buy Allen-Bradley - after all, they both have primary headquarters in both Milwaukee and Cleveland. But a quick look at Eaton's size and market-cap shows that buying A-B would be a major stretch. Unless Eaton merges with Rockwell - hey, that may make sense - stay tuned!

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

Then there is the international group, operating with somewhat different ground-rules; market-cap doesn't have quite the same significance, though global market-share and total sales are still major drivers.

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

It is interesting to note that Yokogawa is the smallest of the more-than-$1b club and has the lowest market-cap to sales ratio. Down below the $1b level, there is US-based Ametek, which bought Drexelbrook Engineering, among others, and remains flat with a poor market-cap to sales ratio.

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

Compare this industrial automation scenario with the Internet stocks: Amazon (sales $1b, market-cap $ 15b, down from about $35b - market-cap to sales ratio of 15:1). Hey, even though Amazon stock is down right now, their market-cap is worth more than Danaher and Eaton combined. Yahoo (sales $0.3b, market-cap $ 33b, down from about $50b) is worth more than Emerson and only recently was more valuable than the Honeywell/Allied combination. AOL worth $ 95b, down from about $150b, is worth more than a combination of all the companies I have mentioned in this long litany of hot automation mergers. The recent decline in prices of these Internet stocks, which show amazing growth but little or no profit, has caused some rationality to remerge. But don’t rule out another run-up as revenue growth continues.

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

Here are my two basic pointers - the primary drivers of the Urge to Merge.
    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

So, look for small and medium-size public companies like Moore Products (as predicted, acquired by Siemens) Roxboro (UK), Woodhead, MTL (UK), Nematron (just emerging from management turnover and significant losses), Transmation (primarily catalog and distribution), to merge 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.

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Copyright 2000 : Jim Pinto, San Diego, CA, USA