A Siemens Shopping List

By Stephen D. Simpson, CFA | February 17, 2011 AAA

Following its rivals ABB (NYSE:ABB) and General Electric (NYSE:GE), it looks like Siemens (NYSE:SI) is preparing to pull out its wallet and try a little more growth-by-acquisition. In an interview with the Financial Times, the conglomerate's CFO Joe Kaeser said that the company had reached a point of "management maturity" and was looking to do deals in the power network and/or plant automation markets worth potentially billions of dollars.

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This is an interesting move for this management team. CEO Peter Loescher has earned high marks for cleaning up and transforming this company and putting it back on a credible growth path. What makes this decision a little more surprising is that a lot of the mess that Mr. Loescher had to clean up was a byproduct of a long series of questionable deals that never really delivered on their price or promise. Perhaps, then, Siemens is tempting fate. Or perhaps a good CEO is a good CEO and Mr. Loescher can successfully integrate deals where his predecessors could not, making M&A a sound use of Siemens' prodigious cash resources.

Who's on the Menu?
At this point, all that Siemens has really declared is that they want to spend billions of dollars in the automation and power markets. Accordingly, that opens a wide range of possibilities for investors to consider. Right off the top, though, investors should forget about ABB, GE or Honeywell (NYSE:HON). The first two vastly exceed Siemens' budget and antitrust officials would go berserk. Likewise, Schneider Electric (Nasdaq:SBGSY) seems too large despite some clear synergies. As for Honeywell, that would seem to involve Siemens moving into too many new and unrelated markets to justify the synergies that may there in areas like automation and power.

Among the names likely to be less familiar to American investors, Alstom (Nasdaq:ALSMY), Andritz, Rexel, Invensys (OTC:IVNYY) and Nexans seem to make the first cut.

Alstom is a key supplier in the business of building large powerplants, but it seems unlikely Siemens wants to be in the generation side of the business. Likewise Rexel's focus on tools and components for the electrical industry, and Nexans' focus on power cables probably makes them less likely to be targets.

Legrand, though, is in the business of power distribution and building management (handling/monitoring things like lighting, heating, power use, etc.) and that could be a logical buy. Likewise, Invensys is a player in automation and control devices and brings significant emerging market exposure - something most large industrials want more of these days. Andritz would be a harder sell, as attractive turnkey solutions businesses in markets like hydropower and biofuel are offset by exposures to very cyclical businesses like paper and steel.

American Possibilities
Turning to the U.S., Eaton (NYSE:ETN), Rockwell Automation (NYSE:ROK) and Emerson (NYSE:EMR) all spring to mind. While Eaton has some businesses (like powertrains/drivetrains) that may not fit with Siemens today, other businesses like hydraulics and power quality components make a lot of sense. Likewise, Rockwell essentially overlaps a lot of what Siemens does already, with operations in industrial automation, power systems, and control products.

Of the American candidates, Emerson seems like a perfect fit. The company has operations in process management, network power, climate management, and industrial automation and those all sync neatly with what Siemens seems to want. On the other hand, Emerson already carries a $46 billion market cap without any takeover premium involved, and that almost certainly is a bigger deal than Siemens wants to attempt.

The Bottom Line
Playing the merger match-up game is a fun exercise, but it bears repeating that buying stocks solely on the premise of a deal is a risky and often fruitless strategy. While Siemens likely will have to bypass synergistic (but huge) deals with the likes of Schneider or Emerson, it would be not be too surprising to see a company like Invensys or Eaton get a knock on the door from Siemens if this company truly is serious about a multi-billion dollar deal in the automation and/or power space. (To learn more, see What Makes An M&A Deal Work?)

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