It's the autumn of the market rally, and merger announcements are piling up like fall leaves. Let's take a romp through the latest.
Hewlett-Packard
Here's what we know right now:
- Strapped for cash, and carrying the same kind of underperforming financial services division that's hobbled Textron
(NYSE:TXT) and Harley-Davidson(NYSE:HOG) , GE plays the part of "motivated seller" today. - It's unloading its Security division on United Tech (UTC), selling off GE Security's $1.2 billion annual revenue stream for a mere $1.82 billion -- about 1.5x sales.
- GE Security is part of GE's Technology Infrastructure business, where GE earns a 17.6% operating margin.
- UTC's own Fire & Security division gets only an 8.4% operating margin on $6.5 billion in annual revenues.
Thus, consummating the merger will give UTC about a 7.7% market share of this "$100 billion global fire safety and electronic security industry." Bigger isn't necessarily better, but the deal does promise to add firepower to UTC's rivalry with security players like Honeywell
How much value?
Chenevert predicts the acquisition won't hurt earnings next year, even after deducting restructuring and transaction costs. By 2011, UTC should already be deriving profits from the deal. Even better for shareholders, UTC is getting the division for a very nice price.
Foolish takeaway
To recap, in one fell swoop, UTC will:
- Increase its Fire & Security revenue stream by 19%.
- Buy what are, in all probability, product lines that earn higher profit margins than its own.
- Do all this without paying much of a premium to its own market valuation.
Sounds like a pretty sweet deal to me.
Unless you're a GE shareholder.
Disagree? Feel free.
Click on over to Motley Fool CAPS and vote for UTC to underperform if you hate the merger, or GE to outperform if you love it.
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