Shares of Emerson Electric (NYSE:EMR), one of the largest industrial companies in the world, rose 12% in September according to data provided by S&P Global Market Intelligence. Through most of the month the stock tracked broadly along with peers, many of which saw a nice rise early in the month followed by a slow trailing off as the month wore on. The big difference for Emerson, and the one that pushed it above the 10% mark that many its peers didn't break, was a pop at the end of the month based on an interesting bit of market news.
In late September Wall Street learned that activist investor D. E. Shaw was building a position in the industrial giant. That sent Emerson's shares sharply higher, as investors anticipated that Shaw would agitate for a breakup. That theory appears to have been confirmed on Oct. 1, when Emerson put out a statement that it was conducting an operational review.
In the news release, CEO David Farr noted, "We value the perspectives of all our shareholders, and we look forward to continuing to engage with them to inform our views as the Board considers key decisions about the future of the Company." And the lead independent director noted that Emerson has a long history of "taking action to drive shareholder value." The market's expectations of D. E. Shaw appear to be right on target.
Emerson has a long and storied history, but the last few years have been particularly active. For example, in mid-2015 the company announced it was going to spin off its network power division and review its business for other potential strategic changes. About a year later it ended up agreeing to sell the network power division for $4 billion. At the same time it announced that it was selling its motors and electric power business for $1.2 billion.
With the recent news of another review, which was likely driven by the involvement of an activist investor, uncertainty is in the air again, and Emerson looks as if it could be a special situation stock. Complicating things further, the CEO noted in the recent review announcement that management expects "a challenging geopolitical and economic landscape over the next couple of years." That's a big hint that he thinks economic growth could hit the skids...and a recession isn't a great backdrop for change at a company that operates in a cyclical industry. And at this point the company has only two major divisions, automation and commercial & residential solutions. So breaking into two separate companies would appear to be the most logical outcome here, if anything happens at all. Most investors will probably want to sit on the sidelines until there's a bit more clarity.