$4.2B Acquisition of Baldor Appears to Be on Schedule

If all goes according to plan, the $4.2 billion acquisition of Baldor Electric Co. of Fort Smith by ABB Ltd. of Zurich will be complete later this quarter. The deal will dramatically expand ABB's North American footprint, and the company is paying a 41 percent premium for Baldor's stock.

"I think it's very good news for the Fort Smith manufacturing community," said recently elected Mayor Sandy Sanders.

"Baldor has been an excellent citizen in the community," he said. "One of the impacts of the sale is that a large number of employees who have had stock over the years have realized a true gain in their value."

The deal was announced Nov. 30, and ABB agreed to pay $63.50 for Baldor shares, which had closed at $44.99 the previous day. It was the largest deal by far involving an Arkansas company that was announced in 2010.

The Swiss power and automation giant said it planned to retain Baldor's name and management, and that Fort Smith would remain the headquarters for Baldor and become the North American headquarters for ABB's combined motor and generator business.

Acquisitions sometimes come with significant layoffs within the company that's being purchased. ABB CEO Joe Hogan told investors that the company's aim was to combine the businesses and that "this is not about reducing employment significantly in any one of the businesses."

However, "the real issue is a year or two or five years down the road, whether that commitment remains," said Kermit Kuehn, a professor at the University of Arkansas at Fort Smith and director of the university's Center for Business Research & Economic Development.

"The game is changed, I guess you could say, when a global company buys a local one," Kuehn said. "There's no way of avoiding that, and they all make their decisions based on, ultimately, their interest."

Officials for Baldor declined to speak to Arkansas Business for this story, but the company has a long history of not laying off employees, though it has made work force reductions through attrition.

"We think this transaction will be especially good for our employees," John McFarland, chairman and former CEO of Baldor, told investors. "We have a lot of very talented people throughout our company and especially here in our Fort Smith, Ark., complex. We will easily absorb the additional responsibility of ABB's North American motors and generators business."

Baldor itself is no stranger to large acquisitions. In late 2006, the company bought the power systems division of Rockwell Automation Inc. of Milwaukee for $1.8 billion, a move that roughly doubled its size in terms of employees and facilities. Baldor employs 7,000 people in several countries, including about 2,000 in Fort Smith. The company's projected 2010 revenue is about $1.7 billion.

ABB employs about 117,000 people in more than 100 countries. Its 2009 revenue - the most recent full-year figure available - was $32 billion.

ABB has had to extend its tender offer for Baldor twice. The original offer was set to expire Jan. 10. An extension was made to allow the Antitrust Division of the U.S. Department of Justice more time to complete its review of the acquisition, a Baldor spokeswoman said.

That was the same reason for the second extension, now set to close Jan. 25. The Department of Justice approved the deal on Thursday, the last of the international regulatory hurdles. Shareholder suits have also been settled in Missouri, with one case in Arkansas scheduled to be settled by mid-February.

Both companies said they still expect the deal to close late in the first quarter.

 

Preferred Products

While ABB does manufacture motors and generators - two of Baldor's key products - the Swiss company hailed Baldor's high-efficiency motors as being top-of-the-line. Hogan told investors that there was less than 10 percent overlap in the two companies' products.

Baldor's high-efficiency motors are a desirable segment for ABB, which projects the market for them will grow 10 percent to 15 percent in the United States in 2011 because of new energy-efficiency regulations that went into effect in December as part of the U.S. Energy Independence & Security Act of 2007.

ABB expects similar regulations will be introduced in Canada, Mexico and across the European Union starting this year.

"As much as we kind of move forward kicking and screaming, we're moving toward more energy-efficient modes of conducting business," Kuehn said. "That's going to take a while, but I think Baldor is in a position to contribute to that and be a good participant in that trend."

But Baldor' products weren't the only factor that interested ABB in acquiring the company. Baldor's distribution network will allow ABB to greatly expand its reach in North America.

"In their motors business, a regional network of 35 sales rep entrepreneurs oversees some 400 field sales people," Hogan told investors. "It's the best-in-class market coverage in this sector and something that has been all but impossible to copy."

At the same time, ABB will use its distribution channels in Europe and the Middle East to sell Baldor products in those markets. Some of the key industries Hogan mentioned include cement, mining, oil and gas and food preparation.

 

Valuable Name

In addition to retaining Baldor's management and headquarters, ABB is also keeping the company's name.

That's not uncommon, said Dan Curtis, director of Arkansas Manufacturing Solutions and vice president of industry for the Arkansas Science & Technology Authority.

"It's a business decision," Curtis said. "If they want to assimilate it then they may change the name and they may not. It just depends on the market and the name and what they feel is going to be to their advantage in the U.S. market. I think Baldor has a good name. They're a very reputable company, well run, and probably the name has some real value in the market."

Scott Alaniz, a chartered financial analyst and founding partner with Boston Mountain Money Management Inc. in Rogers, offered a similar assessment of Baldor. His firm doesn't have any Baldor stock, but Alaniz followed the company when he was an analyst at Stephens Inc.

"That company is extraordinarily well run, and they did an extraordinary job for their shareholders, and they have always done a great job of taking care of their shareholders," Alaniz said.

"We certainly hate to see Arkansas lose an independent publicly traded company, and Baldor is - they're top notch. I think it's one of the highest-quality public companies I've ever been involved with. It's bittersweet; I hate to see it become part of a larger firm. But they got a great price for their shareholders."

ABB's acquisition of Baldor is valued at $4.2 billion - $3.1 billion in cash and $1.1 billion in assumed debt. The Swiss company had about $5.3 billion in net cash as of the end of the third quarter. The Baldor deal followed an attempt to purchase the British power systems firm Chloride, in which ABB was outbid by Emerson Electric Co.

ABB's cash-flush position is not uncommon among large global companies.

"It's timely for large companies to buy small companies, because large companies have built up their cash reserves over the last several years," Alaniz said. "They've been deferring capital expenditures so that their balance sheets have much more cash. And as you know, cash is bringing very, very low returns."

With the sluggish growth in the global economy in the last few years, many companies might decide that organic growth will be difficult, so it might make more sense to grow through acquisition, he said.

And while Baldor, along with a multitude of other manufacturers, took some hits in the recession, its net income and revenue seem to be on the upswing. Net income for 2009 was about $60 million on sales of $1.5 billion. That's down significantly from 2008, which set a record with income of $99 million on sales of nearly $2 billion.

For the first three quarters of 2010, Baldor's net income was $63.5 million on sales of $1.3 billion. Those figures represent year-over-year increases of 12 percent and 11 percent, respectively. And ABB estimates that Baldor's earnings will rebound in a big way, reaching 2008 levels by the end of 2011.

So what do all of these developments mean for Fort Smith and other cities with Baldor facilities?

"The short answer is, I suspect that five years from now, Baldor will look a lot like it does today, only larger and hopefully with more avenues for growth globally," Alaniz said.

Kuehn said that only time would tell, but he cited another instance in which a company with a Fort Smith facility was acquired. Nestlé bought Gerber in 2007 for $5.5 billion. In July, Nestlé announced it would expand its Fort Smith infant foods facility, adding 50 jobs.

"Although Gerber was not homegrown, it turned out that [Nestlé] invested more in our market," he said. "So all I can say is, those things, you never can read upfront as to how it's going to go." 

The same rule applies to the Baldor acquisition.

"As a community, my sense is that we're pretty much feeling good about it, that nothing is going to change," Kuehn said. "But again, that's really taking people at their word, so to speak, that this is going to add a few jobs or it's not going to lose any."