December 24, 2014
A funny thing happened when Honeywell International announced last week that it will buy RFID-, receipt-, and label-printing equipment maker Datamax-O’Neil for $185 million. Honeywell’s stock went up — and so did the stock of the company it will buy Datamax from: Dover Corporation. When Honeywell International announced last week that it will buy Datamax-O’Neil, receipt, label and barcode printer manufacturer for $185 million. Something funny happened! Not the “haha” funny but the kindof funny that makes you go “hmmm”. The stock of the both firms went up!
That’s right! Since the announcement of the deal, shares of Honeywell International have risen by 4.6% and shares of Dover Corporation, the corporation it Honeywell International is buying the Datamax from, rose by an even stronger 4.9%, giving rise to the suspicion if one of those rare events in which both the seller and buyer sides benefit have occurred.
Datamax-O’Neil makes mobile and fixed printers that are used in a variety of retail, warehouse and distribution and healthcare applications, printing out everything from product labels to RFID codes. with $135 million as sales in fiscal 2014, Datamax makes up about 13% of Dover’s printing and identification division, a billion dollar business that’s exceedingly profitable for Dover and according to S&P Capital IQ is earning close to 18% annual operating profit margins.
Honeywell International, describing the acquisition in a press release said that it plans to add Datamax to its existing scanning and mobility business, which is part of the automation and control solutions division. This is now the biggest business of Honeywell International, with $16.6 billion in revenues last year and a 14.7% operating profit margins.
Honeywell sees a global $1.5 billion market opportunity in barcode printing. It views Datamax as offering printing technologies that are highly complementary to its own and it believes that Datamax would help Honeywell scale and offer synergy opportunities to its existing business.
Obviously, the deal’s best part, through the eyes of an investor, is the price. Honeywell International will pay $185 million for Datamax, which is about a 1.37-times multiple to the subsidiary’s $135 million in annual sales and that is a significant discount to the 1.96-times sales multiple that Honeywell’s own shares sell for. In simplistic terms, Honeywell is paying a lower P/S ratio to acquire what’s very likely a higher-profitability business.
Dover corp. has less obvious advantages — but still they are there. For Dover corp. 1.37 times sales is a slight premium to the 1.34 times sales valuation Dover shares currently command and if the deal goes through, Dover will earn this premium and at the same time it exits a business that it says is not “core to our long-term vision.” To top it all off, Dover will get $185 million in cold, hard cash, with which it can pay down a bit of its $2.7 billion debt load.
Thus, this indeed is one of those rare “win-win” occasions.