A funny thing happened when Honeywell International (NYSE:HON) announced last week that it will buy RFID-, receipt-, and label-printing equipment maker Datamax-O'Neil for $185 million. Honeywell's stock went up -- and so did the stock of the company it will buy Datamax from: Dover Corporation (NYSE:DOV).
Since the deal was announced, shares of Honeywell have risen 4.6%. Shares of Dover Corp. are up an even stronger 4.9%. Could it be that this transaction was one of those rare events in which both seller and buyer got a good deal? Let's find out.
What Honeywell's buying
Datamax-O'Neil makes fixed and mobile printers used in a variety of retail, warehouse and distribution, and healthcare applications, printing out everything from product labels to RFID codes. With $135 million in fiscal 2014 sales, Datamax makes up about 13% of Dover's printing and identification division, a $1 billion business that's exceedingly profitable for Dover, earning close to 18% annual operating profit margins, according to S&P Capital IQ.
What Honeywell wants with it
In a press release describing the acquisition, Honeywell noted that it plans to add Datamax to its existing scanning and mobility business, part of the automation and control solutions division that is now Honeywell's biggest business ($16.6 billion in revenues last year, earning 14.7% operating profit margins).
Honeywell sees a $1.5 billion market opportunity in barcode printing, globally. The company sees Datamax as offering "highly complementary printing technologies" to its own, and helping to build "scale" and offer "significant synergy opportunities" to its existing business. The likelihood that Datamax is already more profitable than Honeywell as a whole (where operating margins hover around 14.7% companywide) must also be seen as a plus.
Is the price right?
Of course, the best part of this deal, from an investor's perspective, is the price. Honeywell will pay $185 million for Datamax, which works out to about a 1.37-times multiple to the subsidiary's $135 million in annual sales. That's a significant discount to the 1.96-times-sales multiple that Honeywell's own shares sell for. So put another way, Honeywell is paying a lower P/S ratio to acquire what's very likely a higher-profitability business.
The advantages of this deal for Dover Corp. are less obvious -- but still there. 1.37 times sales is a slight premium to the 1.34 times sales valuation Dover shares currently command. Dover will earn this premium at the same time it exits a business that it says is not "core to our long-term vision." To top it all off, Dover will get $185 million in cold, hard cash, with which it can pay down a bit of its $2.7 billion debt load.
Moral of the story? When companies start buying and selling each other, citing "synergies" as their motivation, I'm often inclined to be suspicious. But in this particular case, we really do appear to be looking at a win-win deal for all parties involved.