Monday was a busy day for mergers and acquisitions, with more than $12 billion in deals being struck, according to Dealogic and Dow Jones Newswires. Amidst all the buzz on the Street, one relatively unsung deal saw diversified manufacturer Honeywell International (NYSE: HON ) acquiring EMS Technologies (Nasdaq: ELMG ) in a $491 million transaction. Investors with interests in the communication and security fields should take note of this move.
What's the deal?
EMS, which provides wireless communication products, put itself up for sale a couple of months back, in an attempt to return value to shareholders. The three-star Motley Fool CAPS stock garnered early interest from New York-based Comtech Telecommunications (Nasdaq: CMTL ) and Honeywell, the latter of which ended up buying EMS for 13 times its EBITDA. Although there is some value here, I find that figure a bit hefty.
Honeywell is expected to close the deal in the third quarter. Although the acquisition isn't expected to have a major effect on Honeywell's earnings this year, it will in all probability be accretive next fiscal year. The deal should also boost Honeywell's mobile computing business and widen its target market, especially adding value to its scanning and mobility businesses.
Figuring it out
Last year, Honeywell made $24.4 billion -- almost 73% of its total revenues -- from its automation and aerospace segments. With the EMS acquisition, Honeywell is aiming to somewhat bolster these niches.
EMS last year generated $355.2 million in revenues and earned $14.1 million. That may not seem like much, but EMS brings a wider target market to the satcom-technology table, and its diverse product offerings may help Honeywell come up with the next breakthrough in this area -- something the company has been searching for. I think this move will translate to a boost in earnings going forward.
The day the deal was announced, EMS's shares jumped 32%. Shares in Honeywell, meanwhile, were relatively unchanged at $55.71. According to Honeywell, the transaction will cut current profits by almost $0.04 a share. The earnings outlook stands at $3.98 per share, but once the deal is fully integrated, Honeywell anticipates earnings of close to $4.57, according to Bloomberg analysts.
The hunt for mid caps
According to Bloomberg, the average premium paid for wireless companies in the past five years stood at 20%, whereas the amount paid for satellite providers was 68%. Companies are starting to see smaller businesses as long-term growth drivers, especially in the aerospace-wireless space, where growth expectations remain pretty meager. Considering some of the larger industry trends, it seems Honeywell may have snapped up EMS at the best possible time.
The Foolish bottom line
Though the acquisition may look a little expensive, I suspect that in the long run it will provide high returns. We'll have to wait and see.