10 July 2008

Reshuffling the automation majors

By Jim Pinto

After a few lean years, most of the major automation companies have generated respectable growth and profits for several quarters. You know the expression, “A rising tide floats all boats.”

As I have predicted previously, this signals a period of new mergers and acquisitions; the weak players are vulnerable to buyout, and the strong are looking for customer-base expansion plus consolidation of talent and resources.

The strong mid-size players, especially publicly-held companies, are subject to attractive buyout offers. The recent MTL acquisition by Cooper Industries is a primary example. Cooper, already $6 billion, is growing aggressively through good strategic acquisitions.

The top 10 are Siemens, ABB, Honeywell, Schneider, Rockwell, Emerson, GE, Yokogawa, Omron, and Invensys. Expect this top tier to be reshuffled soon. So, who will buy whom?

Rule out the Japanese—they are not acquirable and do not know how to make large acquisitions. Honeywell (Process Solutions) is doing fairly well these days, and is likely to make acquisitions—though only relatively small ones, related to wireless. Emerson (Process Management) is well managed and more likely to acquire than be acquired. The Europeans—Siemens, ABB, and Schneider—are indeed looking and have the wherewithal to buy, though they may simply settle for small fry.

My 15 May InTech e-News Pinto’s Point (www.isa.org/link/Pinto20080515) discussed growth obstacles for larger companies, at the Phase-5 tier. The two majors remaining in this category are Rockwell and Invensys.

At $5 billion annual revenue, Rockwell Automation made questionable U.K. acquisitions in an effort to grow, but itself is an acquisition target. The only way they can succeed in the process market is through a big acquisition. But they are more likely to be acquired. ABB is the best possibility; the company is doing well, has a lot of cash, and has process systems (via Bailey, Kent Taylor, and others) but not much of the PLC-base that Rockwell brings.

At $4 billion (£2 billion) Invensys has recovered somewhat, but cannot hope to get much beyond barely eking out marginal profits to meet cash-flow demands. Even as they finished the fiscal third quarter with net cash for the first time in history, Invensys reported only 5% year-over-year sales growth, lagging the other majors.

Invensys stock is still languishing at about 318p; market-cap is about $4 billion. Invensys Process Systems is precarious, and there are those who suggest Foxboro’s instrumentation side is for sale. Rail Systems is unrelated and is available if anyone is interested. The crown jewels, Wonderware and Archestra, are bait for the right whale.

Invensys is dangling in the wind. GE has GE-Fanuc but no DCS—so that is a possibility. Emerson? No. Schneider or Siemens? Maybe. There may be other surprises. Stay tuned.

Related links:

• ISA InTech – Growth obstacles for large companies
  http://r.listpilot.net/c/isa/2k0nayt/1fpwm
• Why Rockwell is a primary acquisition target
  http://www.jimpinto.com/enews/mar7-2008.html#2
• Invensys results, recovery perspectives and growth strategy
  http://jimpinto.com/enews/june23-2008.html#1

Behind the byline

Jim Pinto is an industry analyst and founder of Action Instruments. You can e-mail him at jim@jimpinto.com or view his writings at www.JimPinto.com. Read the Table of Contents of his book, Pinto’s Points, at www.jimpinto.com/writings/points.html.