Recovery Turns Spotlight on M&A Prospects

With even the U.K. having emerged, albeit by a whisker, from recession in January, attention in the financial pages is inevitably turning to M&A candidates, boosted most recently by Kraft's successful £11.5-billion/$19.5-billion bid for U.K. chocolate giant Cadbury. What some commentators have taken from that deal is that, while the price has been sufficiently attractive to tempt the Cadbury board and the majority of its shareholders, U.K. listed companies nevertheless look very affordable to U.S. predators.

Although sterling is well above the depths of $1.37 plumbed early last year, at around $1.60 it's still getting on for 20% down on its pre-recession level of January 2008. Euro zone-based companies might take a similar view with sterling down some 14% against the Euro compared with two years ago. In our own industry, such thoughts inevitably turn to Invensys, where the share price, although more than double its low point of December 2008, is still significantly below the 340+ peak reached in May of that year.

Quarterly statement

Since it has abandoned, at least for the time being, its ambition to list its shares in New York, Invensys now only reports to the market twice yearly. However, last month saw an interim quarterly management statement from the company in which it reported that operating profit before exceptional items for the third quarter was ahead of that in the same period last year. Rail, it said, produced profits in line with last year, as did Invensys Operations Management (IOM), while Controls improved profitability on a similar level of revenue to the previous year.

Less welcome was the fact that the low level of orders at IOM in the first half has continued as oil, gas and chemical customers further delay capital expenditure, although an improvement is expected in the fourth quarter.

Analysts appear to be divided on whether Invensys will achieve its operating profit forecast for the full year, with some suggesting that it will fall short, while others believe a combination of accelerated execution of the order backlog and the impact of earlier cost-saving measures will see it home. The big question then will be whether there is anything left for next year.

One reason suggested for a brief surge in the stock price during January was the possibility that French power and rail group Alstom might have expressed an interest in acquiring Invensys Rail. As well as claiming to be number one in high-speed and very high-speed trains -- it builds France's TGV and AGV -- it also claims to be number two in a range of other rail-related areas, including signalling, Invensys Rail's particular forté.

Interestingly, Alstom announced jointly with Schneider late last month that the two companies are acquiring Areva T&D, the power transmission and distribution arm of the French nuclear power giant Areva. The deal is subject to approval from the French authorities, but is expected to be completed during the first half of this year. The two companies are also cooperating on the launch of a new venture capital fund to back innovative start-ups in the energy and environment sectors. Known as Aster Capital, the fund will eventually be comprised of €40 million from Schneider and €30 million from Alstom, with other industrial partners being invited to chip in. Schneider has its own venture capital fund, Schneider Electric Ventures, which has invested some € 50million in more than 20 companies in Europe and North America since 2000.

Third European force?

One possible eventual outcome of the increasingly close cooperation between Alstom and Schneider could be the creation of a third European force to stand alongside Siemens and ABB. However one of the key elements currently missing from the mix is a credible world-class process automation capability. If Invensys were seen as the means to fill that gap, it would allow CEO Ulf Henriksson to exit on a high point. Henriksson joined Invensys in May 2004 and has been CEO since July 2005 when the share price was just 120p. It’s almost four years since he told INSIDER that Invensys' moment of greatest vulnerability to a predator would occur as it emerged from its recovery phase.

Meanwhile, followers of Jim Pinto's prognostications are still awaiting fulfilment of his prediction that GE will make a move either to dispose of or to strengthen its automation interests including, in particular, GE Intelligent Platforms, now free of the constraints of the joint venture with Fanuc.

One possible pointer to the future is that it has now been moved from its former home in GE Enterprise Solutions to a new division, GE Home & Business Solutions. Also in the new division are a range of businesses in appliances, lighting and switches which the company had considered disposing of in 2008 but now, perhaps in line with chairman and CEO Jeff Immelt’s enthusiasm for manufacturing, are to be retained. Also part of the Home & Business Solutions mix are sensors, alarms and advanced electronics.

Schneider has strengthened its position in the Middle East with the acquisition of leading Gulf-based industrial automation systems integrator Cimac. Cimac' s particular expertise is in automation, control and electrical distribution solutions in the water and wastewater and oil & gas sectors and, as market leader in the Gulf, has some 400 people and sales of more than €40 million.

Invensys Operations Management (IOM) has further extended its presence in the North African oil and gas market with the opening of a new regional sales and operations headquarters in Algiers. Included in the new facility are what is described as an "engineering excellence" center, modernized staging area, technology showcase center and a training and customer support service center.

Algeria supplies a quarter of EU gas imports, while 90% of its crude oil exports go to Western Europe. Like other leading process automation vendors, IOM is seeking a secure future in countries such as Algeria by investing in locally recruited personnel and training customers' engineers and technicians. "We are pleased to contribute to the nation's plans to invest and build effective and efficient systems for a sustainable future," commented IOM EuRA president Teemu Tunkelo, while Mohamed Hales, IOM general director for Algeria, added that "…we remain committed to accelerating knowledge transfer programs that will contribute to Algeria’s development and progress."

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