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Emerson (EMR) to Merge its Software Business With Aspen Technology

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Emerson Electric Co. (EMR - Free Report) intends to strengthen and expand its businesses through mergers and acquisitions. Emerson’s latest deal to combine its industrial software businesses with Aspen Technology, Inc. (AZPN - Free Report) in a deal for about $11 billion is a testimony to it.

Based in Bedford, MA, Aspen Technology, Inc. provides asset optimization software solutions to various industries. The company's solutions aid in optimizing process manufacturing by supporting real-time decision making, predicting equipment failure, and providing the ability to forecast and simulate potential actions.

Emerson's share price decreased 0.9% in the last five trading sessions, eventually closing at $95.73 on Friday.

Inside the Headlines

The deal will involve Emerson merging its software businesses, OSI Inc. and the Geological Simulation Software, with Aspen Technology to form a new company – new AspenTech. Under the cash-and-stock deal, Aspen Technology’s shareholders will be entitled to receive $87 in cash and 0.42 share of the combined entity in exchange for each share they own. Post the deal, which is expected to be completed in the second quarter of 2022, Emerson’s shareholders will own 55% of the combined entity while the rest 45% will be owned by Aspen Technology’s shareholders.

Complemented by Emerson’s strong software capabilities, new AspenTech will be focused on providing end-to-end software solutions to its customers, helping them to boost reliability, safety and production and reduce emissions. New AspenTech is anticipated to generate pro forma revenues of $1.1 billion in fiscal 2022 (ending June 2022) and $490 million of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).

The transaction will enable Emerson to gain control of a high-valued pure-play industrial software leader, expedite its software strategy, and realize substantial synergies, thus driving its shareholders’ value. With this majority ownership in the new AspenTech, Emerson expects to achieve the flexibility and platform required for strategic capital deployment for growth through investments and acquisitions. Emerson believes the transaction will create a win-win scenario for both the companies as it strengthens the commercial alliance between them and enhances their partnership in fields of technology sharing, driving innovation, and developing new products.

As noted, the deal is likely to generate EBITDA synergies of $45 million for Emerson and be accretive to its adjusted earnings after year one.

Emerson also reaffirmed its earnings and underlying sales outlook for fiscal 2021 (ended September 2021, results are awaited). The company expects underlying sales to grow in the range of 5-6% year over year while adjusted earnings per share are predicted to be $4.06-$4.08.

The company is set to release fourth-quarter fiscal 2021 results on Nov 3, before market open.

Zacks Rank, Price Performance and Estimate Trend

Emerson, with a market capitalization of $57.2 billion, currently carries a Zacks Rank #3 (Hold). In the quarters ahead, it is poised to benefit from strength across its medical, life science, food and beverage, and residential end markets. High restructuring expenses and debt level are major concerns for the company.

In the past six months, Emerson’s stock has gained 4.3% compared with the industry’s growth of 3.6%.

Zacks Investment ResearchImage Source: Zacks Investment Research

The Zacks Consensus Estimate for the company’s earnings is pegged at $4.08 for fiscal 2021 and $4.57 for fiscal 2022 (ending September 2022), reflecting growth of 0.2% and 1.6%, respectively, from the 60-day-ago figures.

Stocks to Consider

A couple of better-ranked stocks from the Zacks Industrial Products sector are Albany International Corp. (AIN - Free Report) and Brady Corporation (BRC - Free Report) . Both these companies carry a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Albany pulled off an earnings surprise of 45.47%, on average, in the trailing four quarters.

Brady pulled off an earnings surprise of 2.49%, on average, in the trailing four quarters.