All things considered, it is evident right now that several of the major industrial automation companies are in trouble - growth is elusive and margins continue to shrink. When the decline is temporary, a usually workable strategy is to merge, consolidate the core, divest the dogs, and generate cash to acquire complementary pieces. However, the hoped for cyclical upswing has not materialized this time and the combinations have not generated the expected results. This is simply causing the consolidations and divestitures to repeat with deadly effect.

Past patterns

Success Strategies

Now, Emerson was one of the biggest in the business with - you guessed the name - Fisher-Rosemount. Some growth came with a move into vertical segments by buying, for example, PCD a Division of Westinghouse (the largest supplier of controls to the Electric Utility and Water & Waste industries) and by the introduction of their new DeltaV system. This worked well for a while, but as the last century came to a close, growth flattened for Fisher-Rosemount as it did for everyone else. Unfortunately the rapid growth of DeltaV, the field centered architecture (PlantWeb) and Micro Motion were almost totally offset by declines in more prosaic products like Fisher Valves and older, legacy lines.

Poor Performers

Honeywell - IAC

With lack of clear direction, possibly due to turnover, the management and staff at all levels within IAC are simply not creative, independent and aggressive enough to pursue meaningful acquisitions and product development programs to bolster growth and performance. So, eventual divestiture is inevitable. It will be interesting to note whether Honeywell CEO Michael Bonsignore himself ever publicly contradicts this conjecture.

Invensys

Siebe previously had purchased several other well-known instrumentation companies, though Foxboro was their biggest and boldest move. But, the primary ingredient needed for this kind of acquisition-and-consolidation strategy was missing - organic growth was something that automation simply could not deliver. Profitable growth covers a lot of management missteps and it is not easy to consolidate and divest with speed when sales decline and margins are shrinking.

Allen Yurko, the current CEO, came from Robertshaw, Eaton and Joy Manufacturing. He had a strong financial background and quickly rose to leadership with aggressive acquisitions followed by good implementation, tough management and leveraging good results to make more acquisitions. Sadly, Yurko’s shrewd financial engineering could only yield temporary benefits. The promised growth did not emerge.

Compounding the problem, Yurko, urged on by the archetypical Brit, Chairman Lord Marshall, then bought BTR (would you believe, the initials actually stand for British Tyre and Rubber), a hodge podge of previous acquisitions such as Hawker Siddeley which had not provided the hoped-for growth and profit ingredients. Yurko’s company is now in deep trouble and his downfall must be attributed, not to later missteps, but his biggest mistake - the merger with BTR. The name was changed to Invensys, with a public announcement proclaiming: “The largest company you’ve never heard of before!” But the innovative name could not hide underlying poor performance.

Trying to bolster the faltering Foxboro, Siebe bought Wonderware, the leader in PC human-machine-interface software, right after Intellution (the other PC software leader) had been purchased by Emerson. Wonderware was bought at a heady price, figuring that software growth would continue and it would be a catalyst to rejuvenate the flat Foxboro. But, Wonderware was at the top of its growth cycle and after more than three years in the group, the original business is not growing. So, a strategy of adding other software businesses was pursued: simulation software and other ingredients that complement and supposedly strengthen the Invensys software market leadership. Most recently, with an imaginative and gutsy move seeking to launch Invensys into the enterprise software arena, Invensys bought Baan, the Dutch software company which provides integrated software and services to engineering and manufacturing companies, like Boeing.

But disaster struck in September 2000. With barely enough time for the Baan acquisition to have any results, Invensys shares fell by more than 50% after the company warned that mid-year results would be down from the previous year and up to 3,000 jobs were to be cut. The group is now worth less than BTR, without Siebe, at the time of the ’98 merger. Most analyst reports had been decidedly negative on the Baan acquisition, questioning the logic, given the unproven synergies of the BTR acquisition. With bad news, power shifts swiftly - fickle analysts quickly shifted their stance and pretended that they had been pointing out disaster all along.

The auditors will inevitably blow the whistle on financial tactics that had previously been acceptable and Lord Marshall will place the blame on Yurko. Invensys stock will now very likely continue to slide until something positive happens - and there is nothing positive on the short-term stock-market horizon.

Rockwell

Rockwell’s strategic mistake was to put corporate leadership in the hands of people whose primary background and experience was discrete industrial automation. Don Davis, previously President of Allen-Bradley, quickly shifted the Rockwell emphasis to the markets he knows best. As they kept divesting unrelated businesses, Rockwell annual sales shrunk from about $13b (95) to $10.3b (96), $7.8b(97), $6.7b (98), $7b (99) and flat this year. Results continue to decline and heighten the company's plight.

In September 2000, Rockwell stock fell by about 30% (more than 50% from a year before) on news that it could not meet its forecasts. Market-cap is now about $5b, which makes it a clear target for any of the majors who are interested. Allen-Bradley is the jewel in a tarnished crown with its lack of growth a deterrent. Collins Radio, the other major segment of the business, can easily be divested to one of several companies who have that focus. Take a guess as to which of the automation majors will acquire Rockwell to get A-B. You'd be limited to the very few who are large enough and healthy enough to afford it.

ICS (UK)

An interesting example of things gone sour in industrial automation is ICS Group (in the UK). They bought a bunch of dogs: MAX Control Systems from Leeds & Northrup (which, as I had previously mentioned, was itself sold off piecemeal to Honeywell and others) and also Triplex and Transmitton. At about $110 million in sales a couple of years ago, its final, flailing market-cap of about $12 million (down from about $100 million) reflected serious losses and sales decline. To bail them out of default on bank-loans, a cash-bid of just $2.5 million was made in July 2000 by a low-ball venture group with the dubious name of Alchemy. No, that’s not a typo; it really was sold for a penny a share - about $2m - with some stockholders still holding out for more. The acquisition was supposedly completed in September 2000.

The problem with this type of company is that, although it has some good pieces and management, nobody wants to buy it, because nobody wants the restructuring and integration headaches and costs. The only ones willing to buy a pig in the poke are vulture-capitalists who hope to carve up the carcass and sell it off piecemeal after nominally fixing it up (a little paint here and some layoffs there, coupled with market spin about being healthy and making a comeback). It is doubtful whether Alchemy can really turn ICS into gold….

Predictions, Warnings & Advice

Honeywell needs leadership at the top, which is difficult for a division when the CEO is busy trying to stem downward momentum of the whole ball-of-wax. Short of an acquisition that preserves some value for an acquirer, it may be that IAC will just gracelessly fade into the sunset as others with better people and faster response times eat into their customer base.

Someone has to take the blame at Invensys and inevitably it is the one who previously took the credit. Allen Yurko's exit will simply put Invensys in the hands of an interim CEO who will seek an acquirer. The current stock-price makes Invensys a clear target for Siemens, Emerson, GE or Tyco. Failing a single acquirer, the pieces will be carved up like just so much meat.

The Rockwell board should bring in a creative ball-of-fire like Louis Gerstner, or Steve Jobs (just examples, I'm not saying they are available, or would care to take on the job) who can attempt to re-position the company in the fast-moving age of the Internet. Failing that, one of the majors will buy it. Or, perhaps there is some magnanimous or mystical Warren Buffet or Ted Turner out there, who will see some redeeming value in the industrial automation business.

ICS is the warning to those who fail to see the writing on the wall. It is an example of management has-beens who don’t pay enough attention to customers and their own employees and isolate themselves from reality. They fiddle around in executive suites and boardrooms while their company burns. They must inevitably pay the piper. The only ones who ultimately profit are those who have the stomach for vivisection and the initiative to carve up the carcass. These are the vultures that peddle the pieces and profit off the entrails - the real-estate remains and surplus inventory.

Pinto Perspectives

Industrial automation is currently caught in a peculiar position, between the old and new economies. But, this scenario is not peculiar to just this business. It is happening with startling regularity in the new century, wherever dinosaurs are dying and fast-moving, innovative new entrepreneurs are thinking up new ways to thrive.