Emerson Wins Costly Battle For Chloride; Gains Market Share

Emerson Electric Co. (EMR) emerged Thursday as the winner of an expensive battle for Chloride Group PLC (CHLD.LN), after ABB Ltd. (ABB, ABBN.VX) dropped out of the bidding for the maker of backup power systems for computer centers.

ABB's decision keeps the Swiss-based engineering and industrial-automation company out of the $8 billion a year market for uninterrupted power systems for the time being. Emerson, meanwhile, will boost its third-place stake in the industry to 13% from 9%, putting the St. Louis, Mo.-based company slightly ahead of Eaton Corp.'s (ETN) 12% share. France's Schneider Electric SA (SU.FR) is the market leader with about 26% of the market.

With U.K.-based Chloride, Emerson also will elevate its presence in the European backup power market, a region where Emerson has lagged. More than 60% of Chloride's annual revenue comes from Europe. London-based Chloride reported a pretax profit of $45 million in fiscal 2010 on revenue of about $508 million.

"Seeing Emerson stretch as far as they did for Chloride shows me that Chloride is much more important to Emerson than I previously thought," said Daniel Holland, an analyst for Morningstar Inc. "It shows that network power is very important to Emerson and is really a growth spot."

Emerson, which also has business lines in process management, industrial automation and heating and air conditioning components, declined to comment Thursday on Chloride.

The little-noticed industry for uninterrupted power systems grows at 6% to 8% a year, about twice the rate of other industrial sectors even under healthy economic conditions. Offices, hospitals, universities and other institutions use backup power systems to protect their computer networks from unexpected power outages, making backup power systems an indispensable component for computer data centers.

Despite the attractive industry characteristics, ABB said it wasn't willing to raise its bid for Chloride after Emerson's counter offer Tuesday topped ABB's June 8 offer by 14%.

"While we still see considerable value in the combination of ABB and Chloride, we must take a disciplined approach when assessing potential acquisitions," ABB Chief Executive Officer Joe Hogan said.

Investors and analysts appeared relieved that ABB backed away from escalating the bidding war for Chloride. Some wondered, however, whether Emerson's aggressive pursuit of Chloride was largely aimed at keeping ABB from gaining a beachhead in the network power industry. Emerson has a reputation for not overpaying for acquisitions, making its willingness to engage in a high-stakes competition for Chloride seem out of character for its executives.

"Chloride seems to have turned into more of a defensive jousting match than a move to create shareholder value," said Nicholas Heymann, an analyst for Sterne Agee & Leach.

Emerson on Tuesday offered to pay about $1.5 billion for Chloride, compared with about $1.25 billion offered by ABB. Emerson's offer of $5.65 per Chloride share, or 375 pence, is a 36% increase over its previous offer. Chloride shareholders also would be entitled to the 3.3 pence a share special dividend from Emerson.

Emerson's offer is about a 90% premium to Chloride's average stock price in the three months before the bidding commenced late April.

Emerson's bid equates to about 22 times Chloride's projected pretax income for 2011. Emerson expects to offset the rich multiple with about $50 million in cost synergies. The cost reductions lower Emerson's price premium to about 13 times. That's still a high multiple for an industrial sector acquisition and could keep Emerson's returns from Chloride under pressure in the near term.

But some investors are willing to give Emerson the benefit of the doubt, based on the company's record of quickly integrating other acquisitions and expanding profit margins.

"This is bet on management," said James Hardesty, president of Hardesty Capital Management Corp. in Baltimore, which owns 116,467 Emerson shares. "They've done a pretty good job over a long time. The company's long-term financial performance has been pretty steady."

ABB been on a buying spree recently and has $5 billion in cash to deploy on acquisitions. But with no cost synergies to soften the price for Chloride, ABB would have had difficulty justifying an offer higher than Emerson's, analysts say.

"ABB has clearly communicated it would be disciplined" about acquisitions, said Richard Frei, an analyst for Zuercher Kantonalbank. "They're now acting in line with what they have been promising, which is good. Chloride's customer base would have been nice to have but they aren't the undisputed leader in all the markets."

ABB's American depositary shares were recently trading up 0.9% at $17.44. Emerson's shares were off 0.6% at $43.42.

-By Bob Tita, Dow Jones Newswires; 312-750-4129; robert.tita@dowjones.com

(Martin Gelner and Jonathan Buck contributed to this report.)

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