Emerson Electric's (EMR -0.14%) hostile takeover bid for National Instruments (NATI), or NI, has all the ingredients of a thriller. Eight months and two bids after the initial approach, Emerson's management decided to take the case directly to NI shareholders due to a lack of engagement from the latter's management. This story has legs, so let's look at what's going on and what both sets of shareholders might think of it.
Emerson Electric launches a takeover bid
Having initially approached in mid-May, Emerson proposed a $48 a share (in cash) bid in late May, only to be rejected in June and then dismissed again in August after Emerson reiterated the proposal and included a request for information in late June. Emerson returned in November with a $53 cash bid, which NI promised it would evaluate. Following a flurry of communication and meeting on Jan. 4, followed by a call on Jan. 9, Emerson submitted a fourth proposal on Jan. 11 reiterating the $53 bid describing the information shared by NI's management as "superficial."
Two days later, NI announced a strategic review (with no deadline) and approved a poison pill rights plan "intended to reduce the likelihood that any person or group gains control of the Company through open market accumulation or other tactics." In response, Emerson went public with its bid.
Frankly, I wouldn't bet on this ending amicably.
Emerson Electric, a business in transition
To fully understand matters, you must go back to Emerson's failed bid to buy its automation peer Rockwell Automation in 2017. Under its highly regarded former CEO David Farr, Emerson tried to boost its presence in automation by acquiring Rockwell. Simply put, Emerson's automation solutions segment is more exposed to process automation (processing raw materials, ex., chemicals). At the same time, Rockwell has a more significant presence in discrete (factory and machine, ex., automotive) and hybrid (continuous processing, ex., food and beverage).
Emerson's expansion plans
The bid failed, but the die was cast. Emerson's path was set on becoming a pure-play automation company. Five years later and with new CEO Lal Karsanbhai in place, and Emerson has divested noncore businesses like InSinkErator and Therm-O-Disc, and a majority stake in its climate technologies business. Meanwhile, it acquired industrial software businesses, merged them with Aspen Technology (AZPN -0.55%), and contributed $6 billion in cash for a 55% stake in the new Aspen Technology company. Industrial software is an adjacent and highly complementary market for automation.
Fast forward to Emerson's investor conference in November, and Karsanbhai reiterated the company's pivot to automation. It declared it had identified four adjacent target markets to expand in industrial software, test and measurement (where NI comes in), factory automation, and smart grid solutions.
Emerson Electric bids for National Instruments and bids again
NI makes hardware and software that helps customers automate test and measurement processes so they can develop electronic components quicker and with lower costs. Its main end markets are semiconductors and electronics, automotive, and aerospace and defense, and it also sells into many other industries. As you might expect, it's exposed to where heavy investment is taking place, so electric vehicles, semiconductors, 5G, batteries, digitization, etc. Its main rival is Keysight Technologies (KEYS -0.14%).
Buying NI would expand Emerson's industry reach (remember that it's primarily a process automation company) and give it early access to customers as test and measurement is an early-stage activity.
A crucial part of Emerson's rationale can be explained with a few charts. Emerson's management argues that NI has great technology and market positions helping it generate excellent gross profit margins. However, its operating margin falls short of its peers'.
Data by YCharts
A key reason for this is NI's relatively high selling, general, and administrative (SG&A) and research and development (R&D). Emerson's management believes it can reduce these ratios when NI is under the Emerson umbrella.
Data by YCharts
Where next for shareholders?
For NI shareholders, there's the usual, somewhat cynical observation (regarding takeover bids) that they are now trading against people who may be much better informed about the outcome of the takeover bid than they are, so selling might be the best option. Moreover, Emerson's approach has led to NI's stock trading on 23.2 times estimated 2023 earnings compared to 22.6 for Keysight, and there's no guarantee Emerson might not just walk away. That said, other suitors might step in for NI.
For Emerson shareholders, the deal makes sense as part of Emerson's strategy, but the price seems to assume Emerson can reduce NI's costs accordingly. If it is unsuccessful, management is likely to turn to other targets, one of which could be the remaining share (45%) of Aspen Technology it doesn't own.
