April 18, 2018, by Brooke Sutherland
Emerson Electric Co.’s latest takeover suggests a major breakup of the company is a while off.
The $45 billion industrial company on Wednesday announced it’s buying Textron Inc.’s tools and testing equipment business for $810 million. This relatively small purchase is a far cry from the $28 billion bid Emerson made for Rockwell Automation Inc. late last year, and that’s a good thing. This is more in line with what investors thought Emerson CEO Dave Farr meant when he talked about “incremental” and “bolt-on” acquisitions.
The deal itself seems fine. Emerson says it’s paying less than 12 times the Textron tool unit’s projected 2018 Ebitda, or about 1.7 times 2017 revenue. That’s comparable to the multiples Stanley Black & Decker Inc. paid last year for Newell Brands Inc.’s tools division. The Textron tool business earns less per dollar of sales than Emerson’s own tools and home-products unit, creating a clear source of synergies. Emerson thinks it can boost the Textron unit’s operating margin from 11 percent to 20 percent.
But what’s most interesting about this purchase is what it signals about Emerson’s vision for the company going forward. Speculation about a breakup has grown since the industrial company separated its business into two distinct platforms: One is focused on automation solutions such as measurement tools and control valves, while the other houses a smorgasbord of products for homes and businesses including heating and air conditioning, ceiling fans, instant hot-water dispensers and commercial-refrigeration products.
There are few strategic reasons to keep those segments under one roof, and the bifurcation has become only more stark after Emerson’s reorganization and a spate of divestitures including home-storage business ClosetMaid Corp. and the $4 billion sale of the company’s Network Power division. But if you were going to split Emerson apart, it seems odd to be further enhancing businesses in the more random of the two units. The Textron tool purchase is nice to have, but it hardly seems necessary in order for the commercial and residential business to stand alone.
The timing just may not be right for a bigger breakup as an improving economic outlook and a recovery in energy-related markets lifts industrial stocks. RBC analyst Deane Dray’s sum-of-the-parts model implies only a modest return from a split. What we will probably see going forward is more deals like the Textron tool takeover that round out pieces of Emerson’s existing portfolio and rebuild investors’ confidence in Farr’s ability to execute and integrate deals. The ill-fated $1.5 billion purchase of Chloride in 2010, on which Emerson later took a $508 million charge, still looms large in some shareholders’ minds.
Emerson has said it’s targeting $6 billion in M&A between 2016 and 2021. It’s already spent about $4.5 billion of that, according to data compiled by Bloomberg, including the Textron tool deal and last year’s $3.2 billion purchase of Pentair Plc’s valves and controls unit. Farr said Emerson has the capacity to spend an additional $4 billion on takeovers or share buybacks. But taken together with Farr’s comments about bolt-on deals and the investor pushback he got on the Rockwell pursuit, it seems likely that the CEO is done with legacy-building, transformative takeovers.
Perhaps Emerson’s acquisition activity will further underscore the divergence in its portfolio and lead to a breakup down the road. But for now, Farr seems to be prioritizing building over breaking.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.