Schneider’s has come off a period of restructuring and now is looking to be in the forefront of the consolidation in the industry that it feels will happen globally. Schneider feels that with the advent of worldwide harmonization of standards, probably to the European IEC, the playing field will narrow to only global players. At this time Square D was not interested in being acquired.
In order to judge the strategic fit of these two companies, we will need to look at it from several levels. Their corporate cultures are not a match so the only information able to be obtained comes from this article. Geographically, they both have small presence in the others home market, which is a strong plus. Square D has a sales growth of 3.5% in 1990, but almost half of that comes from the 15% growth in Europe, which is only 10% of their total sales. They also have an overall operating margin of 10.8% which is dragged down by a 2.2% margin on the European business. Square Ds growth in Europe is at the expense of Schneider, so the merger will help stem margin deterioration due to their competition.
A key factor is if the savings in operations given by Lazard Freres of $60 million can be achieved. If this is not a possibility, under a simple combination of the income statements and balance sheets the overall ROE which consists of Square Ds 18.9% and Schneider’s net of 9.1% would net out to an 11.4%. If the savings were included the rate would move up to 12.9%. This is of course excluding any goodwill, write-downs and restructuring charges. Obviously Square Ds earnings of $115 million on and equity of $603 million (18.9%) are an attractive addition to Schneider’s balance sheet, but it does appear that they are more interested in gaining the distribution and size to compete on a global basis. The growth of 3.5% projected by Lazard’s for Square D is in line with their recent performance.
By using the $50 per share that Square D is trading out with outstanding 23,181,000 common shares the market cap is about $1.2 billion and if you paid a 20% premium you would have good will of almost $800 million. In addition to the 1990 ratios, such as the current ratio and debt/equity ratio to Schneider’s would have a beneficial impact, but assuming that the purchasing price will be raised by debt, those would probably turn into a negative impact. Due to all these issues, I would not recommend the purchase of Square D if I were Schneider.
Palepu, K., Healy, P., and Bernard, V. (2004). Business Analysis and Valuation Using Financial Statements. Ohio: Thomson-Southwestern.
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