Rumors have been swirling for a while about whether industrial compressor, blower and pumpmaker Gardner Denver (NYSE:GDI) would, in fact, reach a deal to sell itself and whether SPX (NYSE:SPW) would make an aggressive play for this company. With rumors now heating up that the two companies are in exclusive talks, it's very much worth asking whether this is really a good deal for SPX or Gardner Denver shareholders.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

About Face!
The biggest argument against a deal for Gardner Denver, apart from the fact that it has a very similar market cap and SPX would have to raise funds, is that SPX has been selling a story to shareholders about slimming down and simplifying its portfolio around flow technology, industrial transformers and its thermal business.

A deal for Gardner Denver would fly in in the face of that. While the two companies do serve many of the same end markets in manufacturing and energy, they offer different products and they have different geographic exposures. This would also be a reversal in the sense that investors have been gaining confidence that SPX's efforts to slim down and focus would mean fewer big deals. SPX hasn't really ever been very good at buying businesses, with the last big deal (for ClydeUnion) continuing to disappoint in terms of its likely revenue and margin contributions.

SEE: Biggest Merger and Acquisition Disasters

Can Gardner Denver Make SPX Better?
None of this is to say that there aren't sound reasons to contemplate this deal. First of all, financing costs are pretty low today, so the cost of raising capital for the deal is pretty low. More than that, though, Gardner Denver has earned a pretty solid reputation for its operating acumen, particularly with its lean manufacturing. While SPX has been reporting operating margins in the mid to high-single digits, Gardner Denver has consistently been in the mid-teens. Gardner Denver also happens to be positioned in higher-growth products/segments, so you could argue that buying Gardner Denver is a chance for SPX to basically trade low-growth with weak economic moats for more differentiated/competitive products with more growth potential.

Along these lines, there's at least one possible outcome that should be considered. Maybe, just maybe, an acquisition/merger of Gardner Denver would put members of its management teams in senior positions at SPX. I doubt that there will be a wholesale turnover or that SPX's CEO would step aside, but putting Gardner Denver's management in charge of more of SPX's assets would be a definite net improvement for SPX shareholders in my mind.

Will This Deal Help the Competition?
While I don't want to throw SPX management under the bus, I can see this rumored deal being a positive for Gardner Denver's rivals. I think competitors like Ingersoll-Rand (NYSE:IR) and Atlas Copco (OTC:ATLKY) would love to see Gardner Denver's assets under SPX management, and would likely see it as a chance to gain or recapture market share.

SEE: Evaluating A Company's Management

At a minimum, this deal would seem to position SPX more deeply at the "instrument" level of client plants, as opposed to the "control" level, and I'm not sure that's where SPX really needs or wants to be. To that end, I have to wonder if a deal for a company like Invensys (OTC:IVNYY) (which would also be quite expensive) wouldn't be better - at a minimum, it would deepen the company's exposure to flow and process automation and play on that "control" level idea.

The Bottom Line
If I were running SPX, I would probably try to see if I could get good terms for the thermal business and put those proceeds (along with the money from the sale of Service Solutions) towards more assets in flow/process control and automation. It's not that I don't like Gardner Denver; I think it's a very good company, but rather that I think there are a lot of integration and execution risks with this deal.

In any case, I hope Gardner Denver's management holds out for a good offer. The business outlook for 2013 is tough right now, but this is a quality company and I'd hope for a bid of at least $80 to compensate for the execution risk with a SPX deal - particularly if there's a sizable stock component to the bid.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Markets

    Why Gluten Free Is Now Big Business

    Is it essential to preserving your health, or just another diet fad? Either way, gluten-free foods have become big business.
  3. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  4. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  5. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  6. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  9. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  10. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!