Colin Barry

Schneider / Square D M&A (BAV, Tuesday, Week 8)


Is this a good fit?
-- U.S. market entry for Schneider
-- Square D = mostly residential, Schneider = mostly industrial
-- Economies of scale (R&D)
-- Distribution channels

-- Hostile!
-- Competing standards => how good will synergies be?
-- At what price?
-- Earnings impact for Schneider (goodwill amortization)
-- Not a clear turnaround opportunity: Square D mgmt is good

Seemingly innocuous assumptions can have serious consequences:
Lazard DCF valuation for Square D connects sales to change in long-term assets, NOT level of long-term assets. Model projects long-term depreciation (as a percentage of sales) below CAPEX (as a percentage of sales) we end up with a massive asset base.
Takeaway: you probably need to forecast out the balance sheet...

Think about assumptions embedded in the market price of a stock. Large portion of Square D equity value is based on presumed synergies from a merger/M&A premium.