Doosan Infracore has decided to buy three units of Ingersoll-Rand, for US$4.9 billion.
Considering that the corporate practices of Korean chaebols are medieval to say the least, it will be interesting to see how well Doosan will integrate the three US companies into its corporate structure.
Also this begs the question, what kind of name is “Infracore?”
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Infracore your life.
This company has a waygook CEO, so the odds are better than usual that Bobcat’ll be properly digested. BTW, WSJ’s Evan Ramstad has an article that goes beyond the press release (unlike the linked one above). Probably requires a subscription:
http://online.wsj.com/article/....._news_asia
The CEO of Doosan Infracore is Korean (Choe Sung Chul).
This deal looks like a fairly good match. Bobcat has obvious parallels to DI’s existing product line, and it gives DI instant production facilities in a number of countries.
Bobcat’s revenues and profits were down last year, and Ingersoll wanted to dump it (too capital-intensive), but that was due to lower US construction, where Ingersoll has most of its sales. Maybe DI can do better selling construction equipment globally.
#3: OK, the Infracore CEO’s boss is a waygook. From WSJ:
“Its parent, Doosan Group, has transformed itself more radically than any conglomerate in the country over the past decade. And the group is the only Korean conglomerate led by a foreigner, James Bemowski, an American and former McKinsey & Co. consultant who became its chief executive officer in November”
This is only the latest (and biggest) of Doosan’s forays into the US acquisition market. To my knowledge, they acquired at least one other significant player in the energy production field over the past several years: a relatively small but very successful mfr. of controls; of course, they also bid for but lost Westinghouse’s nuclear generating business to Toshiba. Nevertheless, they (and their predecessor in interest, Korea Heavy) long have had a close relationship with Westinghouse (and its various predecessors in the nuke business) and GE in connection with nuclear generating plant, especially in Korea, but now also in China.
I think it’s a good move for Doosan. Over at my Korea Law Blog I’ve got a post up on this same topic.
We are probably going to see a reversal of the balance of acquisitions. Economic fortunes are changed: The won is riding high and US assets are now cheap.
Brendon, you were here when the Korean economy went tits up, right? It felt as if every second word on the lips of the newscasters was ‘IMF’. The propaganda machine was turning its wheels in full force. So, this “reversal of balance” is quite ironic to me.
For those of you who weren’t here…If someone’s dad lost his job, if some idiot committed suicide, if a bad restaurant closed, if a company went bankrupt because of its own mismanagement, if someone’s car got a flat tire or his dog died…it was because of the ‘IMF’ and the evil Americans behind it.
Personally, a hot 5-11, modelesque type Korean girl I was dating had to go back to Korea because of the East Asian Economic Crisis. So I hate the IMF dammit! Grrrr…
Less reactionary, but somewhat similar logic regarding the detrimental actions of the IMF is shared by Harvard economist Jeffery Sachs.
Don’t start chasing that
ambulanceEquus 450 stretch yet, Brendon; it remains to be seen whether there are many US companies desperate enough to accept installment payments from a Korean purchaser, and whether there are many more Korean firms capable of successfully negotiating deals in the real world. Doosan, along with one handful of others, is an exception, because of their long history of commercial relations with major players in big-stakes industries (e.g. power generation. But even they are quite bumptious and, in my direct experience, take inconceivably long to conduct transactions, which they do in an infuriating mix of inefficiency bordering on incompetence, very studied dumb-playing and outright dishonesty. [If you're tempted to ask me to say what I really think, bear in mind that my perspective on this was from their side of the table.] And just wait for the fallout from that first missed installment payment and the trumped up explanation from Doosan why it was “inevitable”. The markets have the minds of elephants for the sort of shenanigans in which Korea Inc likes to indulge and it usually checks the greed factor as long as the players aren;t desperate or naive.Come now, Sperwer. I am not naïve enough to think that Brendon Carr might benefit from a wave of outbound Korean investment. I’ve been here long enough to know Koreans do not hire non-Koreans as professional advisors.
While they like the foreign brand as a marque of quality, Korean enterprises with outbound needs generally look for their co-ethnic brothers within foreign law firms. And that’s perfectly natural, even fair. Just as I believe that I do a better job than Korean professionals when it comes to serving the needs of non-Korean enterprises, Koreans have a right to get services their way.
And I wouldn’t be caught dead behind the wheel or in the back seat of an Equus. Hyundai makes a lot of good cars; that one is not among them. My daughter is not yet 10 and she recently surprised me by commenting on the paucity of interior space on such a big, bloated car.
My take on the Ingersoll Rand’s Bobcat sale to Doosan Infracore and the Korean history of M&A.
First of all, the history of Korean M&A is pretty sad. Samsung buys disk drive maker AST and LG buys Zenith. Both acquisition targets were dogs because they had crappy products and crappy financials. Samsung almost bought bankrupt aircraft maker Fokker, but luckily that deal didn’t go through. These ill advised acquisitions were encouraged by the Korean government because back then Korea wanted to buy technologies and brand names even if the company that owns the technologies and trademarks were crappy. These deals were, predictably to anyone who does M&A for a living, a failure. But then you live and learn, right?
From pure numbers basis, Bobcat is not a great deal. Total consideration is $4.9 billion. Bobcat is $2.6 billion in sales and $370 million in earnings (or in the M&A vernacular- EBITDA). Thus the deal is for almost 2x (or 1.88x) sales and 14x EBITDA. Most investment bankers thought that this deal would be for $3 billion or just over one times sales and 10x EBITDA, something more akin to market price. Almost 14x EBITDA took everyone by suprise and is way over market price. In this industry you use comparables such as Caterpillar and John Deere. Both these companies are trading on the stock market at 12 and 13x EBITDA to enterprise value. However, Bobcat isn’t worth what Caterpillar and John Deere are because it’s MUCH smaller (by a magnitude of 15 to 20!). Bigger is better in the M&A world.
So why do it? Well, the acquisition very quickly adds $2.6 billion of sales to Infracore BUT… adds $4.2 billion of debt (Infracore will pay for the deal with $700 million of cash and $4.2 billion of debt)! So you borrow $4.2 billion of debt for $2.6 billion of sales? Doesn’t make sense at first, especially when the typical ratio for a deal of this size is 30 / 70 percent not the 14 / 86 percent ratio that Infracore got. Guess who gave them the non-market rate debt financing so that they can pay the non-market rate price for Bobcat? You guessed it a Korean bank- the state-run Korea Development Bank. My gut tells me that Infracore got the debt cheap with very favorable terms and easy covenants. Is this fair? Well, if you can get cheap debt any way you know how, more power to you. There is no loyalty in the corporate debt markets, so alls fair. As long as you can grow out of your debt and have solid companies, then you are okay. Kind of like buying a house on a loan and gradually increasing your income so the mortgage payments are not so bad over time. You guys just got a lesson in Leveraged Buyouts 101.
Bobcat is no AST or Zenith. It’s got good growth, good reputation and good margins (for a capital equipment manufacturer). $4.9 billion is too much. Credit Suisse and Goldman Sachs brokered the deal for Ingersoll-Rand and did a fantastic job, getting them a great price. Obviously, after a draconian process where all the buyers were beaten to a pulp (which is why Goldman Sachs makes AND EARNS their money) Doosan was the last one left standing.
Only time will tell if this deal will pan out. The planned synergies have to be real and in five years Bobcat’s sales and profits will have to increase considerably to pay their “mortgage payments” comfortably. But this deal’s got much better financial fundamentals then Korea’s earlier mistakes in M&A and hopefully it will point to better things in the future for the corporate development and M&A strategy of Korean companies.
Doosan couldn’t buy Cat or John Deere, but Bobcat was available. Obviously, Doosan believes — and has bet — it can grow the Bobcat business by buying US manufacturing and distribution and building out a worldwide distribution network. The Bobcat product line is a good one and well-suited for the Korean market.
Plus, if the financing really is “non-recourse” financing as reported, Doosan doesn’t really have to pay US$4.9 billion if it doesn’t work out anyway. Bobcat and Doosan are both potential winners, but the much of downside risk is foisted off onto the Korean taxpayer through KDB, and the Bobcat employees if the acquisition is a flop and they all get laid off in a liquidation.
“infracore your happy”
What?
Anyhoo, a lot more likely went into their valuation than simply EBITDA multiples and revenue.
I think WangKon936 might have made the case for it being a good deal. Individual stocks of Caterpillar or John Deere may be selling for 12X earnings, but surely he knows that if someone actually wanted to buy ALL their stocks, whether by LBO or other process, the price would go up considerably.
Even rumors of takeover talks regularly push prices up by 20% or more in a day.
Since Doosan only paid a multiple of 14x earnings, that should mean that the Goldman players weren’t all that good, or that the price was reasonable (and I’m sure the Goldman fellas are good).
Korea’s banks: indeed they do have a problem, just like China’s, Japan’s, Russia’s and the Mid-east banks – they have waaaay to many US dollars hanging around getting less and less valuable. A little 5 billion investment doesn’t even add up to their exchange losses in the last month. You can’t blame them for trying to spend some of their hoard buying up overseas assets, can you? At least it’s Bobcat, and not Sudanese oilfields like the Chinese buy.
AST Research was not a “disk-drive maker.” (I’m guessing computers is not your industry sector.) AST was a PC manufacturer which formerly was one of the stars of the industry and was even briefly in the Fortune 500.
Perhaps you’re thinking of Maxtor. I heard Samsung destroyed Maxtor but I don’t know the history on that one. Maybe “destroyed” means “defeated”.
But you’re right about the past Korean acquirors being garbage-pickers. Sometimes the asset is just garbage and is cheap for a reason.
#13
There is no way in hell Infracore can buy either Cat or JD. It would require Infracore to provide equity that they don’t have and to take on debt that they couldn’t possibily sustain by themselves. By order of magnatude, Infracore is $15 billion sales and Cat is over $40 billion.
Nonrecourse financing, huh? It’s not easy to get that. Regardless, if this deal goes south, then KDB will have to try and peddle this company to make up the finacing, which would be $4.2 billion! It would have to be a real dog for you to HAVE TO liquidate it and you are not going to get $4.2 billion for a dog. You are right, the Korean tax payers (and perhaps even retirement funds?) foot most of the risk on this one.
I have to admit, those midget Bobcat movers and excavators would work rather nicely in the small spaces of Korea, Japan and China. I don’t know how good Infracore’s distribution in China is, but if you can sell those little Bobcats in China, then that would be HUGE.
# 15,
Multiples of EBITDA (or adjusted earnings/profit) is the price tag / market rate in the M&A world. You may pay over the price tag in a bidding war for whatever reason, be it strategic or otherwise, but the benchmark is the multiple of EBITDA. The reasoning being that you are constrained by how much a business throws off in cash, because that cash needs to be used to pay off the debt that you incurred to purchase said business. Again, all leveraged buyouts 101 stuff.
# 16
Infracore, in the short term, overpaid. The only way this deal makes sense is if Bobcat’s sales and profits rise at least 30% in the next 5 years, otherwise, it may be an albatross around Doosan’s neck, sucking up free cash flow that can otherwise be used to fund growth and new product development. Almost 14x is way ABOVE market for a captial goods manufacturer. All investment bankers thought this deal would trade for around 10x or $3.2 billion. $4.9 billion valuation took all the professionals by suprise.
#17,
Yeah, I got AST confused with Maxtor. I was an undergrad (maybe even my freshman year?) in college back when Samsung bought AST. Domestic M&A (my area) rarely focus on consumer electronics anymore. U.S. firms have conceded much of that (and their razor thin margins) to Asian manufacturers.
That’s one thing that’s looked at.
But other things, such as exit p/e, exit p/b, etc. are important.
Anyway, as you know things are different whether it’s simply a leveraged buyout, or a strategic acquisition, as here. Which is why EBITDA is perhaps not the most important consideration and bigger is not necessarily better.
But who knows? Doosan may have overpaid. Time will tell.
WangKon identified an issue which I am certain will haunt Koreans in the future:
There soon will be very large impact on the market from Korean pension funds. Not just the National Pension Plan (Korean Social Security), which now reportedly has US$200 billion in assets under management, but also supposedly “private” pension funds.
By 2012 NPS expects to be managing US$300 billion. Recently the NPS announced a partnership with Morgan Stanley for management of all this money. But because it’s “national” money, expect strong government pressure to “invest” this in “national” projects. We already can see warnings on this in the recent news reports that NPS will be protecting Woori and/or other so-called strategic companies from the hated foreign speculators.
And they will grab for more. In 2005, the severance-pay provision of the Labor Standards Act were rolled into the new “Retirement Benefit Guarantee Act”, which establishes for the first time a company’s option to set up defined-benefit and defined-contribution pension plans, which will be about 8% of the total wage bill. That will be a lot of money piling up. Since the pension funds will be managed under the supervision of the FSS and Ministry of Labor (MOLAB especially is not known for its business savvy), can anyone expect independence will be allowed to the managers?
I expect a lot of pension money to be frittered away on “national” projects.
You mean like bankrolling the mandarinate’s off-shore detours and frolics, (personal) offshore asset purchases? or just the domestic white-elephants – like a dozen empty and unused or grossly underutilized soccer stadiums, or the newly proposed golf course bonanza – from which the usual suspects can siphon off their vig?
Probably more of this second bad option. “National” projects tend to be focused on placating the masses and their fear of job insecurity.
And, really, “vigorish”? That I know this word makes me feel old.
Yeah, “technically”, it’s not vigorish, but the penumbra of the word – which I first learned from the son-in-law of Tough Tony Anastasia, the head of the Murder, Inc. clan of the five families of New York – captures the true aura of
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