For a company that helps factories do things more smoothly, Rockwell Automation is creating a whole lot of friction with would-be acquirer Emerson Electric. Rockwell, the Milwaukee-based process-automation specialist, has countered an unwanted $29 billion offer from its rival with what’s best described as an equally hostile rebuttal, arguing that the combination would be weaker and the bid’s value too uncertain. Rockwell has enough of a point that Emerson is unlikely to prevail with the approach as it stands.
In a schematic world, a combination of Emerson and Rockwell has appeal. Emerson is depended on by operators of big, complex and highly delicate operations like oil and chemical plants, while Rockwell excels at a smaller scale, such as among electronics manufacturers. And the headline price — some 30 percent above Rockwell’s 90-day average — is compelling.
But since Emerson is paying partly in stock, Rockwell’s boss, Blake Moret, can comfortably dodge that fact. The real value of a deal depends on the fair value of that paper currency. One smudge against Emerson’s stock is simply that it hasn’t performed as well as Rockwell’s. The other is that Emerson has done only two deals over $1.5 billion since 2010 — and one of them, Chloride Group, ended with a nasty write-down of $508 million.
Paying in shares also leaves Emerson open to scrutiny of its questionable claims that a deal would create $6 billion of value for shareholders. One-third of that would be from higher sales, which are always hard to realize because they involve customers paying more or rivals losing market share. The company refuses to say what the annual cost savings of a merger would be. It’s a relevant question, because if the synergies don’t come through, Rockwell shareholders will share in the disappointment.
In a simple argument about price, Mr. Moret would have a bigger fight on his hands. Emerson could argue that his 31-year run at the company clouded his judgment. But that can’t happen unless Emerson is prepared to offer consideration that has unassailable value — namely cash. That would leave the company with high levels of leverage, around six times Ebitda, according to a Breakingviews estimate. But it’s probably the only way to batter through Rockwell’s defenses.