By : Jim Pinto,
By : Jim Pinto,
This not not just another critical commentary. It traces the decline of some past industry leaders and points out the patterns that are developing as companies from the old industrial age enter a new era. It offers predictions, warnings and advice.
Controls Intelligence & Plant Systems Report, October 2000.
The stock market continues to demand results that the automation sector simply cannot deliver. While CISCO, EMC and other technology companies continue their seemingly inexorable growth, industrial automation delivers nothing but dreary doldrums - growth forecasts fumbled, earnings projections not met. Trying to run up a down-escalator thwarts even the best of managers.
All things considered, it is evident right now that several of the major industrial automation companies are in trouble - growth is elusive and margins continue to shrink. When the decline is temporary, a usually workable strategy is to merge, consolidate the core, divest the dogs, and generate cash to acquire complementary pieces. However, the hoped for cyclical upswing has not materialized this time and the combinations have not generated the expected results. This is simply causing the consolidations and divestitures to repeat with deadly effect.
Past patternsThink back on the leading instrumentation & controls companies of yesteryear. Many of them are now simply product lines or parts of consolidated divisions.
Success StrategiesIn the meantime, Fisher Controls, a major manufacturer of valves and fluid controls had become part of Monsanto, the chemical giant that had hoped vertical integration would help its balance sheet. When that didn’t quite work as expected, Monsanto sold Fisher to Emerson Electric, a respectable mixture of motors and miscellaneous. Emerson had first bought Brooks (flow meters) in the 1960’s, Rosemount in 1977 (famous for pressure transmitters) and Micro Motion (inventors of the Coriolis mass flow meter) in the 1980’s. They evidently felt that their strategy for success was to move control and functionality to the field. This field centered measurement and control architecture strategy (PlantWeb) has been quite successful.
Now, Emerson was one of the biggest in the business with - you guessed the name - Fisher-Rosemount. Some growth came with a move into vertical segments by buying, for example, PCD a Division of Westinghouse (the largest supplier of controls to the Electric Utility and Water & Waste industries) and by the introduction of their new DeltaV system. This worked well for a while, but as the last century came to a close, growth flattened for Fisher-Rosemount as it did for everyone else. Unfortunately the rapid growth of DeltaV, the field centered architecture (PlantWeb) and Micro Motion were almost totally offset by declines in more prosaic products like Fisher Valves and older, legacy lines.
Poor PerformersTo get back to our theme, let’s review some of the companies currently at various stages on the critical list.
Honeywell - IACThe industrial automation and control group was once a primary segment of Honeywell; the other segments included home-and-building controls, space and aviation controls. Today, after the merger with Allied Signal, Honeywell continues to be embarrassed by poor results in the automation sector and its stock continues to slide.
With lack of clear direction, possibly due to turnover, the management and staff at all levels within IAC are simply not creative, independent and aggressive enough to pursue meaningful acquisitions and product development programs to bolster growth and performance. So, eventual divestiture is inevitable. It will be interesting to note whether Honeywell CEO Michael Bonsignore himself ever publicly contradicts this conjecture.
InvensysA decade and a half ago Foxboro was one of the big names in process controls, vying with Honeywell for industry leadership. Sadly, bloated management with outdated ideas caused its decline and the company was then bought by Siebe an obscure British industrial conglomerate. I remember when, shortly after it was acquired, the then President of Foxboro published a full-page open letter in the WSJ and trade journals, announcing how Siebe would be good for Foxboro. As I read the advertisement, I gave him sixty days to exit - he was gone in thirty.
Siebe previously had purchased several other well-known instrumentation companies, though Foxboro was their biggest and boldest move. But, the primary ingredient needed for this kind of acquisition-and-consolidation strategy was missing - organic growth was something that automation simply could not deliver. Profitable growth covers a lot of management missteps and it is not easy to consolidate and divest with speed when sales decline and margins are shrinking.
Allen Yurko, the current CEO, came from Robertshaw, Eaton and Joy Manufacturing. He had a strong financial background and quickly rose to leadership with aggressive acquisitions followed by good implementation, tough management and leveraging good results to make more acquisitions. Sadly, Yurko’s shrewd financial engineering could only yield temporary benefits. The promised growth did not emerge.
Compounding the problem, Yurko, urged on by the archetypical Brit, Chairman Lord Marshall, then bought BTR (would you believe, the initials actually stand for British Tyre and Rubber), a hodge podge of previous acquisitions such as Hawker Siddeley which had not provided the hoped-for growth and profit ingredients. Yurko’s company is now in deep trouble and his downfall must be attributed, not to later missteps, but his biggest mistake - the merger with BTR. The name was changed to Invensys, with a public announcement proclaiming: “The largest company you’ve never heard of before!” But the innovative name could not hide underlying poor performance.
Trying to bolster the faltering Foxboro, Siebe bought Wonderware, the leader in PC human-machine-interface software, right after Intellution (the other PC software leader) had been purchased by Emerson. Wonderware was bought at a heady price, figuring that software growth would continue and it would be a catalyst to rejuvenate the flat Foxboro. But, Wonderware was at the top of its growth cycle and after more than three years in the group, the original business is not growing. So, a strategy of adding other software businesses was pursued: simulation software and other ingredients that complement and supposedly strengthen the Invensys software market leadership. Most recently, with an imaginative and gutsy move seeking to launch Invensys into the enterprise software arena, Invensys bought Baan, the Dutch software company which provides integrated software and services to engineering and manufacturing companies, like Boeing.
But disaster struck in September 2000. With barely enough time for the Baan acquisition to have any results, Invensys shares fell by more than 50% after the company warned that mid-year results would be down from the previous year and up to 3,000 jobs were to be cut. The group is now worth less than BTR, without Siebe, at the time of the ’98 merger. Most analyst reports had been decidedly negative on the Baan acquisition, questioning the logic, given the unproven synergies of the BTR acquisition. With bad news, power shifts swiftly - fickle analysts quickly shifted their stance and pretended that they had been pointing out disaster all along.
The auditors will inevitably blow the whistle on financial tactics that had previously been acceptable and Lord Marshall will place the blame on Yurko. Invensys stock will now very likely continue to slide until something positive happens - and there is nothing positive on the short-term stock-market horizon.
RockwellRockwell got out of aerospace and fax/modem-chips and moved into industrial automation with the purchase of Allen-Bradley. Up to that time, A-B had been privately held and was a prize that Siemens, Emerson and others had bid for.
Rockwell’s strategic mistake was to put corporate leadership in the hands of people whose primary background and experience was discrete industrial automation. Don Davis, previously President of Allen-Bradley, quickly shifted the Rockwell emphasis to the markets he knows best. As they kept divesting unrelated businesses, Rockwell annual sales shrunk from about $13b (95) to $10.3b (96), $7.8b(97), $6.7b (98), $7b (99) and flat this year. Results continue to decline and heighten the company's plight.
In September 2000, Rockwell stock fell by about 30% (more than 50% from a year before) on news that it could not meet its forecasts. Market-cap is now about $5b, which makes it a clear target for any of the majors who are interested. Allen-Bradley is the jewel in a tarnished crown with its lack of growth a deterrent. Collins Radio, the other major segment of the business, can easily be divested to one of several companies who have that focus. Take a guess as to which of the automation majors will acquire Rockwell to get A-B. You'd be limited to the very few who are large enough and healthy enough to afford it.
ICS (UK)What happens when a company gets into trouble and cannot recover? Well, the usual answer is that it gets bought out, or sold off, or merged into another entity. Something they have is valuable to someone else, a competitor perhaps - products, technology, market-share, people or location. But sometimes, the rot goes much deeper and there is very little left to save.
An interesting example of things gone sour in industrial automation is ICS Group (in the UK). They bought a bunch of dogs: MAX Control Systems from Leeds & Northrup (which, as I had previously mentioned, was itself sold off piecemeal to Honeywell and others) and also Triplex and Transmitton. At about $110 million in sales a couple of years ago, its final, flailing market-cap of about $12 million (down from about $100 million) reflected serious losses and sales decline. To bail them out of default on bank-loans, a cash-bid of just $2.5 million was made in July 2000 by a low-ball venture group with the dubious name of Alchemy. No, that’s not a typo; it really was sold for a penny a share - about $2m - with some stockholders still holding out for more. The acquisition was supposedly completed in September 2000.
The problem with this type of company is that, although it has some good pieces and management, nobody wants to buy it, because nobody wants the restructuring and integration headaches and costs. The only ones willing to buy a pig in the poke are vulture-capitalists who hope to carve up the carcass and sell it off piecemeal after nominally fixing it up (a little paint here and some layoffs there, coupled with market spin about being healthy and making a comeback). It is doubtful whether Alchemy can really turn ICS into gold….
Predictions, Warnings & AdviceSo, what will happen to the industrial automation majors? Only the very best management teams can win in this environment. The ones that survive (Emerson) will rethink their strategies and shift their emphasis to growth arenas, with speed and agility that must match the fast-moving pace of the new century. The companies that are gone, or are going, allow themselves to become obsessed with ill-conceived growth (Invensys), or cost containment (Honeywell), only to see their automation businesses begin to die.
Honeywell needs leadership at the top, which is difficult for a division when the CEO is busy trying to stem downward momentum of the whole ball-of-wax. Short of an acquisition that preserves some value for an acquirer, it may be that IAC will just gracelessly fade into the sunset as others with better people and faster response times eat into their customer base.
Someone has to take the blame at Invensys and inevitably it is the one who previously took the credit. Allen Yurko's exit will simply put Invensys in the hands of an interim CEO who will seek an acquirer. The current stock-price makes Invensys a clear target for Siemens, Emerson, GE or Tyco. Failing a single acquirer, the pieces will be carved up like just so much meat.
The Rockwell board should bring in a creative ball-of-fire like Louis Gerstner, or Steve Jobs (just examples, I'm not saying they are available, or would care to take on the job) who can attempt to re-position the company in the fast-moving age of the Internet. Failing that, one of the majors will buy it. Or, perhaps there is some magnanimous or mystical Warren Buffet or Ted Turner out there, who will see some redeeming value in the industrial automation business.
ICS is the warning to those who fail to see the writing on the wall. It is an example of management has-beens who don’t pay enough attention to customers and their own employees and isolate themselves from reality. They fiddle around in executive suites and boardrooms while their company burns. They must inevitably pay the piper. The only ones who ultimately profit are those who have the stomach for vivisection and the initiative to carve up the carcass. These are the vultures that peddle the pieces and profit off the entrails - the real-estate remains and surplus inventory.
Pinto PerspectivesMy previous predictions are in the process of unfolding: the big-10 automation majors will inevitably become the big-5. Some changes are happening even as I write and by the time this is published (mid-October) new events may have occurred. Stay tuned….
Industrial automation is currently caught in a peculiar position, between the old and new economies. But, this scenario is not peculiar to just this business. It is happening with startling regularity in the new century, wherever dinosaurs are dying and fast-moving, innovative new entrepreneurs are thinking up new ways to thrive.
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