Emerson said Tuesday it will spin off businesses that generate roughly a third of its revenue, leaving a smaller, more focused company that executives say will generate the kind of growth and margins its investors have come to expect.
The strategic moves mean sales for the manufacturer, based outside St. Louis in Ferguson, Missouri, will shrink from $24.5 billion a year to about $16.3 billion.
Emerson’s network power business, which makes power systems that work with telecommunications and data networks, will be spun off into a separate publicly traded company, a transaction expected to be completed by Sept. 30, 2016. The network power business currently accounts for about 20 percent of the company’s revenues.
Emerson also said it would explore “strategic alternatives” for motors and drives, power generation and storage businesses that are housed in its industrial automation division.
In a conference call with analysts, Emerson Chairman and CEO David Farr said the moves are “an opportunity to reposition Emerson as we have done many times in the past in this company.”
A more nimble company means shrinking some of the corporate services that support Emerson’s global operations. Already, the company earlier this year began a restructuring that last month it said was some $140 million. On Tuesday, Farr told analysts that it was now a “$200-plus-million repositioning” to cut costs in “all segments.” The company will look at even more cost cuts as the corporate profile of Emerson shrinks, he said.
“We have created a corporate structure around the world, not just here in St. Louis … where we support a larger company,” Farr said. “And a company that’s going to be $16 billion, you need to reassess every corporate action that we do for the operations.”
In a phone interview with the St. Louis Post-Dispatch, Farr noted that Emerson has made other large strategic shifts in the past, referencing its 1990 decision to spin off its defense operations, creating Esco Technologies Inc.
The company’s conglomerate structure will be streamlined from five distinct divisions to two. One will be a “process and industrial” division that combines its remaining industrial automation businesses with its oil and gas services heavy process management. The other will combine its commercial and residential products like garbage disposals, plumbing products and wet/dry vacs with its air conditioning, refrigeration and climate-control business under a “commercial and residential” division.
“We’re going to look very hard to invest in these two key marketplaces,” he said.
From there, Emerson sees sales growth and margins improving when freed from the slower growth of Network Power and the other businesses. While the process and industrial division is expected to generate nearly twice the revenue and grow faster, Farr signaled confidence in the smaller energy and commercial products business. “I would not ignore the other segment,” he told analysts.
Emerson’s network power business, which works with data centers, was one of its top performers 15 years ago, driving overall earnings at the company. But in recent years, even after several billion dollars of acquisitions, its growth has slowed in the competitive market it operates in.
However, Farr still played up the network power business, noting it was profitable and generated plenty of cash.
It has the “opportunity to really drive value for that unique business on its own metrics … versus the metrics that we expect here at Emerson, which are obviously a little bit higher than the Network Power business can deliver.”