Emerson Shareholders to See Diluted Value From National Instruments Acquisition
We are reducing our fair value estimate to $103 on the overpriced deal.
After reviewing wide-moat rated Emerson’s EMR presentation on the National Instruments NATI acquisition, we reduce our fair value estimate to $103 from $105.
Emerson’s proposed NI deal undoubtedly gives it a better foothold in the discrete automation space and growthier industrial software exposure. Yet, despite the solid strategic rationale, we think Emerson is overpaying for NI, even assuming they achieve 100% of the cost synergies they’ve outlined. In fact, Emerson’s purchase price of $59.61, which incorporates the 2.3 million shares it already owns, implies it’s paying somewhere between 12%-13% more than it previously offered. Not so long ago, Emerson’s management denied it would be willing to pay $60 or over for NI’s shares. While it isn’t quite paying $60, we point out that the agreed-upon purchase price is only marginally lower.
Worse still, the cost synergies Emerson announced of $165 million by year five, prior to any costs to achieve, are a little lower than we were hoping to see. Previously, we were hoping to see about 8% cost synergies by year three. Instead, our math estimates that the implied cost synergies are between 6.5%-7% of NI’s sales, but at a two-year later date. Consequently, we think that Emerson’s January slide presentation on the potential cost improvement opportunity relative to peers was a bit misleading.
We stand by our prior assessment that comparing NI and Keysight KEYS was an apples-to-oranges comparison. Both businesses have different areas of focus, with Keysight focusing on communications solutions, and NI focusing more on automation. Nonetheless, we credit Emerson with 100% of its anticipated cost synergies, only because we think the target isn’t that impressive.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.