Emerson Shareholders to See Diluted Value From National Instruments Acquisition

After reviewing wide-moat rated Emerson’s EMR presentation on the National Instruments NATI acquisition, we reduce our fair value estimate to $103 from $105.

Emerson’s proposed NI deal undoubtedly gives it a better foothold in the discrete automation space and growthier industrial software exposure. Yet, despite the solid strategic rationale, we think Emerson is overpaying for NI, even assuming they achieve 100% of the cost synergies they’ve outlined. In fact, Emerson’s purchase price of $59.61, which incorporates the 2.3 million shares it already owns, implies it’s paying somewhere between 12%-13% more than it previously offered. Not so long ago, Emerson’s management denied it would be willing to pay $60 or over for NI’s shares. While it isn’t quite paying $60, we point out that the agreed-upon purchase price is only marginally lower.

Worse still, the cost synergies Emerson announced of $165 million by year five, prior to any costs to achieve, are a little lower than we were hoping to see. Previously, we were hoping to see about 8% cost synergies by year three. Instead, our math estimates that the implied cost synergies are between 6.5%-7% of NI’s sales, but at a two-year later date. Consequently, we think that Emerson’s January slide presentation on the potential cost improvement opportunity relative to peers was a bit misleading.

We stand by our prior assessment that comparing NI and Keysight KEYS was an apples-to-oranges comparison. Both businesses have different areas of focus, with Keysight focusing on communications solutions, and NI focusing more on automation. Nonetheless, we credit Emerson with 100% of its anticipated cost synergies, only because we think the target isn’t that impressive.