The idea that Swiss industrial giant ABB (NYSE: ABB) is making an acquisition is about as surprising as Thursday following Wednesday. ABB has been openly on the hunt for acquisitions for a few years now, and most of the surprises about the company's M&A activities have centered on deals that slipped away from the company. On Tuesday, though, ABB announced it had agreed to acquire Baldor Electric (NYSE: BEZ) in an all-cash deal.

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The Deal
ABB is paying $63.50 in cash for each Baldor share, a 41% premium to Monday's closing price and a total deal value of $4.2 billion. That is quite an impressive end to a recovery run in Baldor's stock that began back in March 2009 at a price below $11 a share. In fact, Baldor's shares had risen about 55% year-to-date, so ABB is certainly not stepping in and buying an asset that has been ignored by Wall Street. Moreover, at about 14 times trailing EBITDA, ABB certainly does not seem to be underpaying for this company.

What ABB Is Getting
Perhaps Baldor's stock had been strong this year due, at least in part, to some anticipation of a bid. After all, Baldor is a very good strategic fit for ABB. ABB is broadly involved in two businesses - power products and automation - but the company was somewhat deficient in motors/drives in the North American market. That happens to be where Baldor is very strong, and it will help ABB's efforts to compete against the likes of Siemens (NYSE: SI) and General Electric (NYSE: GE) in the industrial automation market.

Baldor is a leader in several segments of the North American market for motors and drives. Its motors are used in a wide range of industrial applications, including material handling (conveyors and the like), air handling (fans and blowers) and fluid handling (pumps), including specialized and so-called "severe service" niches that make up premium markets.

ABB Has Some Work To Do
Although Baldor's business looks like a good strategic fit for ABB, it is not a flawless deal. ABB is paying up for this business and will be hard-pressed to drive a return in the deal that meets or exceeds its going ROIC. In other words, this deal could ultimately destroy shareholder value.

ABB also must deal with the good and bad of buying a mostly North American business. More than 80% of Baldor's revenue comes from North America, and the company's manufacturing base is predominantly in the U.S. - not necessarily the most cost-effective option. By the same token, Baldor generally does not target markets where price-based competition is the norm (which mitigates some of the cost base risk), and it seems quite reasonable to think that a global player like ABB can significantly expand Baldor's customer base.

Other Options
ABB's acquisition of Baldor is not necessarily any sort of broad affirmation for the motors industry. Nevertheless, investors may want to explore other players like Regal Beloit (NYSE: RBC) and A.O. Smith (NYSE: AOS). Regal Beloit, in particular, may be interesting. While Baldor shares seemed to benefit from expectations of new energy efficiency regulations in the U.S., Regal could benefit from similar moves in Europe or China. Further, Regal is no slouch in its own right and has recently been trading at the lower end of its valuation range relative to Baldor.

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