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.
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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.
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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.
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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.