What: U.S.-based Terex Corporation (NYSE:TEX) announced late yesterday that it will merge with Finnish Konecranes, sending Terex shares up 20% today. The all-stock deal gives Terex shareholders 60% ownership of the new company, which is the driver behind today's big run-up. However, even after the big jump, Terex stock is still well below last year's high:
So what: The key drivers behind the merger? Taxes; global competition; increased scale. According to the merger presentation, the new company -- to be called Konecranes Terex -- will be incorporated in Finland, making this a so-called "inversion," where a company uses a merger to move its headquarters to a country with a lower income tax rate. Considering that two-thirds of the new company's sales will be outside the U.S., the strategy -- patriotic feelings or no -- makes financial sense.
Additionally, the companies say that increased competition -- especially from Chinese manufacturers -- is a real concern that the combined company will be better able to challenge.
Now what: The merger likely will create a stronger company, but the reality is that these deals rarely produce all of the promised "synergies," and most of the cost savings and additional profits will probably be due to the company's ability to reduce labor costs by consolidation, and reduced taxes. The current foreign currency exchange headwinds that are hurting Terex are good for Konecranes, so they would largely benefit the new company, headquartered abroad, if the dollar remains as strong as it has. But since currency exchange is very cyclical, it may not be a positive once the merger is complete and is far from a sustainable advantage.
Lastly, the global construction industry continues to slow, with weakness in both developed and developing economies weighing on manufacturers like Terex and Konecranes. There's also weakness in demand for the company's handling equipment, which serves markets like shipping ports. This won't change just because of the merger, but if the combined company is able to cut costs and more effectively leverage its resources because of the greater scale, then it will help drive better profitability.
Again, even after today's 20% jump, Terex's stock is well down, and as a manufacturer supplying a cyclical industry, now is definitely a downturn in demand for that industry. Looking ahead a few years, Terex (or Konecrane Terex once the merger is complete) is likely to do very well when the cycle turns. It's not clear when that could happen, but patient investors willing to ride out the current lag -- which could last another couple of years -- could do worse even after today's big jump.