The bidding war for National Instruments, or NI (NATI), is heating up, according to Reuters. Not only is Emerson Electric (EMR 0.39%) still firmly in the frame, but NI's rival Keysight (KEYS 1.51%) and industry peer Fortive (FTV 0.85%) are also believed to be part of the process. What's going on, and what does it mean for the investment proposition for these stocks? Here's the lowdown.

Why National Instruments is an attractive target

In a nutshell, NI operates in some desirable industrial end markets, but its margins lag behind its peers. As such, an acquirer could add value by improving NI's operational performance while gaining exposure to growth markets. 

NI operates in the software-connected automated test and measurement systems market. Its solutions help industrial customers accelerate the time to market of their products while meeting ever more stringent regulatory requirements. Key end markets include semiconductors (for use in 5G and Wi-Fi in particular), advanced diver assistance systems (ADAS), electric vehicles (EVs), and cognitive systems in aerospace and defense. 

Why Emerson Electric wants to buy National Instruments

The gist of Emerson Electric's argument that NI's operational performance lags behind its peers can be expressed in the following charts. As you can see below, NI's gross margin (an indication of how well its products compete in the marketplace) exceeds its peers -- NI does have good technology. However, it's spending noticeably more of its revenue on research and development, and its sales, general, and administrative costs are much higher as a share of revenue. 

NATI Gross Profit Margin Chart

Data by YCharts

The bottom line is that NI's operating profit margin is significantly behind its peers. 

NATI Operating Margin (TTM) Chart

Data by YCharts

Emerson's last bid for NI of $53 a share has pulled NI's share price to around $51, and as you can see below, it's now trading on a forward enterprise value to earnings before interest, taxation, depreciation, and amortization (EBITDA) comparable to the peers that are also believed to be bidding for the company. 

As such, the case for Emerson buying NI can be summed up as follows: 

  • Its valuation is similar to its peers, but Emerson has a significant opportunity to add value by growing NI's margins.
  • As outlined at its investor conference, buying NI would be an enactment of Emerson's aim of expanding into adjacent end markets -- the four target markets are industrial software, test and measurement (where NI comes in), factory automation, and smart grid solutions.

Alternative bids

The Reuters article claims sources close to the matter are saying NI has told Emerson, Fortive, and Keysight that their offers are good enough to qualify them for a second round of bidding. It's always possible that a bidding war could erupt and price Emerson out of a deal -- Emerson's CEO Lal Karsanbhai told analysts, "we're not going to be the purchaser of the asset" if NI insisted on a price above $60 on the last earnings call. But Emerson still looks like the most likely winner. 

Keysight is a direct competitor, and a successful bid could lead to antitrust concerns. Furthermore, the company has just disappointed investors with its earnings outlook for 2023. Fortive is a high-quality company with a strong acquisition history. Still, its management wants to maintain an investment grade rating , and this might not be the best time to test investor appetite by trying to raise equity. 

What it would mean for Emerson Electric 

As for Emerson, its current $53 a share bid implies an enterprise value for NI of $7.6 billion. That's well within Emerson's reach, as it has $8 billion in available proceeds from from the sale of a majority stake in its climate technologies business. 

In addition, Emerson's bid aligns with Karsanbhai's aim to transform Emerson into a pure-play automation company. It's unfortunate it comes at a time when NI's main rival, Keysight, is reporting softness in its end markets. Usually, that sort of thing leads bidders to take a more skeptical view.

However, Karsanbhai has laid down the transformational path for the company, and it makes sense to continue it by pursuing NI. Moreover, at the current offer of $53, the deal looks like a decent value, and Emerson probably has a little more legroom to increase its bid and get the deal over the line.