January 18, 2023

Breakingviews: Emerson’s hostility tests aggressive M&A tools

by Breakingviews.

Emerson Electric is trying out some new M&A tools. It disclosed on Tuesday an unsolicited $6.9 billion offer for NI, which makes testing devices and software for the semiconductor and aerospace industries, in an effort that assesses the utility of aggressive deal measures.

After a quiet standoff with Emerson, the company formerly known as National Instruments said on Friday that it was examining its strategic options and had implemented a poison pill. Then, newish Emerson boss Lal Karsanbhai let investors know about the $53 a share offer, which started back in May at $48.

Emerson is remaking itself under Karsanbhai. In October, it agreed to sell a majority stake in its heating and air conditioning unit to buyout firm Blackstone, pocketing some $9.5 billion in the process. Buying NI would put the proceeds to work by pairing Emerson’s automation processes for manufacturing with NI’s testing ones.

NI Chief Executive Eric Starkloff was unpersuaded. He rebuffed Emerson when NI shares were trading at just $34 apiece. The sweetened bid didn’t work either, perhaps because NI stock reached $46 in 2021.

It’s easy to understand why Emerson might be frustrated. While its offer was under wraps, NI bought back a chunky 2 million shares. And the limited overlap between the two companies probably means a deal would face fewer regulatory questions than one with a closer peer. Keysight Technologies has been cited by analysts as one possible buyer.

Developments suggest that NI is now a seller, at what promises to be an even higher price. Full-fledged auctions tend to maximize value, partly because it can lead to irrational bidding. NI’s shares were trading right around Emerson’s offer on Tuesday, implying anticipation of a bigger premium.

Emerson’s hostility looks questionable at this point. NI’s estimated $340 million of pre-tax profit in 2023, according to Refinitiv data, implies a modest 3.5% return on investment assuming it pays the statutory corporate tax rate, or less than half what Morningstar pegs as its weighted average cost of capital. It would take some hefty cost savings and revenue uplift to make the numbers stack up.

Karsanbhai is getting a bad response from his own shareholders too. Emerson lost about 6% of its market value, or about $3.5 billion following news of the offer. Maybe it will persuade other acquisitive CEOs from getting destructively assertive.

Context News

Engineering services provider Emerson Electric said on Jan. 17 that it had offered to buy NI for $7.6 billion, including debt. The $53 a share entreaty represents a 13% premium to where NI’s stock closed on Jan. 13, the last day of trading before the offer was made public. Emerson said it had originally offered $48 per share in May 2022 but was rebuffed. Emerson added that NI, which makes measurement and testing tools, has not “meaningfully engaged” since its $53 offer in November. NI, previously known as National Instruments, on Jan. 13 enacted a takeover defense tactic known as a poison pill. If a buyer acquires more than 10% of NI’s stock, other shareholders will have the right to buy an equal amount of shares as they hold at a 50% discount. The plan expires on Jan. 12, 2024. Emerson has purchased 2.3 million shares in NI, or about 1.8% of the amount outstanding.

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