Emerson (EMR) and Avocent (AVCT) announced today that Emerson would acquire Avocent for $1.2 Billion in cash. Emerson is sitting on approximately $1.5 Billion of Cash. The transaction will effectively consume all of Emerson's cash on hand no matter how it is actually financed. Gudovac believes Emerson's first rate Management is prudent and normally sensible. However, he believes they are over paying for Avocent.
Avocent is a good company which has been hit hard by the downturn in IT spending, specifically server farms.
Perhaps Emerson's management know something the rest of us do not....owners can hope. The Emerson Teleconference and Presentation describing the benefits of acquiring Avocent did not reassure Godovac. The Emerson Presentation appeared to have been cooked up by some sell side investment banker types - full of blather about strategic fit. Avocent's business does fit well within Emerson's core business. Whatever. The important question isn't whether Avocent is a good strategic fit. Plenty of businesses would be good strategic fits for Emerson.
The important question is the price paid for Avocent high or low ? Is Avocent a bargain at $1.2 Billion Cash ? If Avocent at $1.2 Billion is not a bargain, then no reasonable amount of strategic synergies is going to make it add value to Emerson's Owners.
Avocent
Avocent is a company that used to have solid 14% EBIT margins in 2006. Avocent seems to have chased top line growth over profits. In 2008, Avocent achieved less than a 6% EBIT margin on revenues that were more than 25% higher than 2006. Mr. Market punished Avocent mercilessly for the drop in performance. Avocent's Enterprise value is now a quarter of its peak levels.
Bargain or Expensive ?
Is Avocent a bargain or is it expensive ? Owners can ignore the horrifying loses over the first half of 2009 to give Emerson's management the benefit of doubt. Let's assume that Avocent's performance in 3rd and 4th quarter 2009 is already known by insiders to be good due to backlog or order intake numbers. Some may suggest granting this benefit of the doubt is giving management a big get-out-of-jail-free-card. Since Gudovac has such great faith in EMR's management, he'll try and accommodate EMR's management as much as possible by ignoring Avocent's horrifying losses.
Gudovac will simply measure if Avocent is a bargain relative to Emerson's valuation. Since Avocent doesn't generate meaningful profits, the sole semi-reliable metric Gudovac can use is topline revenue versus Enterprise value. The revenue-enterprise value metric is crude - but illuminating in this case.
Emerson's Enterprise Value versus TTM revenues is 1.48
Avocent's Enterprise Value at purchase price versus TTM revenues is 1.96
Jaded Owner's might therefore conclude that Emerson's management is overpaying by some 30%. Emerson is buying a company that is in a proto- turnaround situation, yet paying more for it than Mr. Market values Emerson itself. The aqusition of Avocent for $1.2 Billion cash harms Emerson's owners. Owners should seek to limit Emerson's management ability to shop via Board Resolution.
Shopping for some managers becomes a bad habit - best cut up the credit cards as soon as possible.
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Don't Get Massacred !
Gudovac1941@gmail.com
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