Truck engine maker Cummins (CMI 0.80%) is making a big bet on the electrification of the transportation sector, on Monday announcing plans to acquire Meritor (MTOR) for $3.7 billion in cash and assumed debt. That's a significant premium over Meritor's Friday close, and the target is up more than 45% as a result.
Meritor is a maker of drivetrain, braking, and powertrain components for the commercial vehicle and industrial markets, a business that complements Cummins' core diesel engine operations well. But as importantly, Meritor is also a supplier of components for electric and hybrid drivetrains, an area that Cummins is trying to expand into.
Cummins CEO Tom Linebarger in a statement called the deal "an important milestone" in his company's history.
"Meritor is an industry leader, and the addition of their complementary strengths will help us address one of the most critical technology challenges of our age: developing economically viable zero carbon solutions for commercial and industrial applications," Linebarger said. "Climate change is the existential crisis of our time and this acquisition accelerates our ability to address it."
Cummins is willing to pay up to buy Meritor. Terms of the deal call for Cummins to pay $36.50 per share for the target, a premium of 48% to the company's Friday close.
This is a deal that is about today and tomorrow. With Meritor, Cummins is positioned as one of the few one-shop stops for integrate powertrain solutions whether a buyer wants diesel or electric propulsion. Although the world is moving toward electric or another alternative power source, it is going to take a long time for heavy trucks to get there. This deal is designed to help Cummins to cash in on its core business while it is still the dominant technology, while also making progress toward making sure it is ready when the alternatives replace that business.
The deal is expected to close before year's end, and since it is all-cash, Meritor holders have little upside from here and no chance to go along for the ride if the upside Cummins is hoping for materializes. That's a bit of a shame for long-term holders, though it is hard to complain about an overnight 40%-plus jump.