Coverage: Rockwell Automation rejects $27.5 billion offer

Automation equipment maker Rockwell Automation Inc. said on Tuesday it had rejected an unsolicited acquisition bid from bigger rival Emerson Electric Co. for more than $27 billion, arguing that the offer undervalued the company.

Greg Roumeliotis of Reuters had the news:

The snubbed bid illustrates how Emerson CEO David Farr, who has been at the helm for 17 years and had previously indicated he would consider only small, bolt-on acquisitions, is now seeking a transformational deal to diversify Emerson’s businesses and reduce their exposure to volatile energy prices.

Emerson’s strength is in process automation, helping power plants and factories in sectors such as mining and cement operate more efficiently. Rockwell, on the other hand, is a leader in so-called discrete automation, helping assemble component parts to manufacture items such as automobiles, household appliances and computer systems.

Rockwell said it had rejected a $215 per share bid from Emerson, split in half in its consideration between cash and Emerson shares.

Rockwell shares gained 7.4 percent to close at $200.82 on Tuesday. They are up 46 percent year-to-date, versus a 16 percent rise in Emerson shares.

David Faber of CNBC reports that Emerson has made multiple offers for Rockwell:

Emerson’s most recent offer for Rockwell, worth more than $27 billion, was in early October for $215 a share, split evenly between cash and stock. Like the $200 a share offer in early August and one a few weeks later, Rockwell gave a terse rejection, according to people with knowledge of the correspondence.

Rockwell Automation shares were up 12.7 percent at the opening bell in response to CNBC’s report. Emerson Electric shares were fractionally lower.

An Emerson official confirmed the company has made recent offers to purchase Rockwell, but would offer no comment beyond that.

Rockwell, a fiercely independent Midwestern company with a relatively new CEO, has been no stranger to Emerson as that company has looked for opportunities to consolidate in the industrial automation sector. But after years of trying to engage with Rockwell, Emerson for the first time made a formal offer to buy Rockwell in August. That offer was for $200 and when met with rejection, Emerson came back with both a higher price and with concessions on social issues that it hoped would bring Rockwell to the negotiating table.

Brooke Sutherland of Bloomberg Gadfly wrote that other suitors are expected to emerge:

That kind of response isn’t surprising. This is Rockwell Automation we’re talking about — it’s among the few remaining big industrial companies with one general expertise. Most of the others have been acquired over the years and embedded into one conglomerate or another. That includes its sister company, Rockwell Collins Inc., which agreed to sell itself this year to United Technologies Corp. As a direct beneficiary of the push to make factories and equipment run more efficiently, Rockwell Automation has only gotten more attractive for industrial buyers trying to adapt their businesses to the digital world . Given all that, it can honestly name its price.

Emerson was never going to waltz in with a sub-20 percent percent premium and be able to walk away with a deal. True, Rockwell Automation shares had already surged 39 percent so far this year before Tuesday’s pop, and analysts on the whole saw the stock as overvalued. But logic tends to go out the window when the target in question is a trophy asset that’s likely to spark a bidding war. While Rockwell Automation has arguably been “in play” for years, Emerson has just fired the starting gun of what’s sure to be a competitive race.

Perhaps the most logical alternative suitor is Honeywell International Inc. The company agreed earlier this month to spin off its turbochargers and consumer-facing home technologies businesses amid pressure from activist investor Third Point LLC. The simplification was smart and allowed Honeywell to offload legacy liabilities, but the announcement hasn’t done much to boost the company’s valuation. What could make a difference is meaningful M&A. A takeover of Rockwell Automation would align with CEO Darius Adamczyk’s effort to increase Honeywell’s software-related revenue, while also offering more in the way of traditional cost synergies than some of the company’s more recent acquisitions of smaller start-ups.