Siemens AG, Market Cap (as of 26/09/2014): €83.16bn
Dresser-Rand Group Inc., Market Cap (as of 26/09/2014): $6.3bn
Siemens AG (NYSE:SI), the Munich-based global powerhouse in electronics and electrical engineering, has agreed to acquire Dresser-Rand Group Inc. (NYSE:DRC), the Houston-based leading supplier of equipment for the oil and gas sector. According to the agreement for the $7.6bn all-cash transaction (including debt financing), Siemens will pay $83 a share with an additional $55c applied on the first day of each month starting in March 2015, until the closing occurs. The last time Siemens made an acquisition of comparable size was in 2007 when it bought Dade Behring, a US-based maker of medical diagnostic equipment, for about $6.4 billion. The offer price implies a premium of about 37% over Dresser-Rand’s closing share price of $60.42 on July 16, the day before the stock price was boosted by rumours of a potential bid.
Although the acquisition price appears very high, especially considering the decrease in the orders volume for Dresser-Rand’s oil and gas products and services over the last twelve months, Joe Kaeser, CEO of Siemens, believes that the investment will pay off in the long-term. To his view, acquiring Dresser-Rand is a promising way to cash in on unconventional drilling techniques, such as hydraulic fracturing or fracking, that have made the United States what he has called “the place to be for oil and gas”. Moreover, this acquisition could unlock some potential value arising from the boom in the extraction of natural gas from shale. In fact, the company is a major supplier of equipment for liquefied natural gas plants, which will be used to export surplus gas from North America. In addition, Dresser-Rand provides equipment for refineries and petrochemical plants, another fast growing business.
Quoting Mr. Kaeser, “As the premium brand in the global energy infrastructure markets, Dresser-Rand is a perfect fit for the Siemens portfolio. The combined activities will create a world-class provider for the growing oil and gas markets. With this Dresser-Rand will become ‘The oil and gas’ company within Siemens.” In fact, this acquisition is another step in Siemens’ long-term effort to concentrate on businesses in which it has the potential to become a leading player. In a separate deal also announced last Sunday, Siemens said it would sell its 50% stake in Bosch und Siemens Hausgeräte (BSH), its household appliances joint venture, to Bosch for $3.8bn. The disposal was widely expected as Siemens has gradually withdrawn from its consumer-facing businesses as a result of high competition from faster-moving rivals. On the other side, Bosch oversees growth potential in the sector, as household devices will become more connected via the Internet. Even if Siemens is still a major producer of consumer goods, including hearing aids and home security systems, the company has consistently done better in businesses where the customers are other companies or governments.
Finally, Siemens acquisition of Dresser-Rand plays an important role in the rivalry between the two industrial giants General Electrics and Siemens. In fact, the two companies have been rivals for years as they are the two main players in the industry. However, the competition increased in 2014 when GE succeeded in its $16.9bn acquisition of Alstom power and grid business, even though Siemens had the support of the French government. The acquisition of Dresser–Rand has overcome the possible GE’s bid-aspiration on the oilfield equipment manufacturer and has rebalanced the competition in the market. In fact, even if when it comes to financial success GE is certainly superior to the German based company due to its size and financial strength, the acquisition of Dresser-Rand represents an opportunity for Siemens to improve the share in revenues and net income in the energy sector, which lately went through a slight decline.
Morgan Stanley & Co. LLC and ZAOUI & Co. acted as financial advisors to Dresser-Rand. Wachtell, Lipton, Rosen & Katz, and Gibson, Dunn & Crutcher LLP, served as legal counsel to Dresser-Rand.
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