Construction Wars: Komatsu's Joy Global Acquisition Puts Cat Among The Pigeons!

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Includes: CAT, JOY, KMTUY
by: Lawrence Williams

Summary

World No. 2 construction equipment manufacturer, Japan's Komatsu, has agreed to buy U.S. part-competitor Joy Global.

The acquisition, worth a reported $3.7 billion, will strengthen Komatsu's product line range to more closely match that of world No.1, Caterpillar.

Caterpillar and Komatsu have been head-to-head competitors for most of the past 50 years.

The announcement that Japanese construction equipment giant Komatsu (OTCPK:KMTUY) - the world No. 2 - is to purchase the U.S.'s smaller, but very significant semi-competitor Joy Global (NYSE:JOY), could have a serious impact on the U.S.'s own construction giant - world No. 1 Caterpillar (NYSE:CAT). For years Cat and Komatsu have gone head to head in the marketplace - to the extent that many years ago - so I'm led to believe - there was a poster in Cat's Peoria headquarters which said 'Competition is spelt with a K'. This was almost certainly brought home in no uncertain terms when Komatsu acquired Dresser Industries which owned the then largest U.S. heavy mining electric truck manufacturer WABCO, just down the street from Caterpillar's headquarters in Peoria in 1994!

Equally though Komatsu had always set its sights on emulating and out-competing Caterpillar with varying degrees of success in different global markets. According to Wikipedia, when Komatsu entered the U.S. market back in 1967, thus taking on Caterpillar directly on its home turf, this was done under the company slogan of "Maru-C", translating into English as "encircle Caterpillar" (from the Japanese board game of Go, where encircling an opponent results in capture of his territory).

Indeed product for product Caterpillar's and Komatsu's general construction equipment line was remarkably similar. Caterpillar will aver that Komatsu copied its products, at least in a sectoral sense, with equipment units designed to compete directly in world markets. But over the past two decades or so, Caterpillar moved much of its focus from standard construction equipment to heavy duty mining equipment - a sector which it has tended to dominate with its big mechanical-drive mining truck line-up along with drilling and large-scale earthmoving equipment for the mining sector - much acquired through take-overs of leading companies in their respective fields. It has also diversified through acquisitions into underground hard rock and coal mining equipment and had become one of the U.S. and the world's largest suppliers of such machinery and equipment. Indeed the Cat website announces itself as having the broadest product line in the mining industry. Komatsu's acquisition of Joy may well mean this is no longer the case and Cat's position as the global No.1 mining and construction industry manufacturer may also now be threatened.

The strength of the yen as perhaps an even more secure safe-haven currency than the US dollar so far this year may have tipped the scale in terms of the Komatsu decision to go ahead at this time. It has advanced around 10% against the dollar year to date according to Forbes magazine.

While Komatsu has followed Cat in so many equipment areas, the acquisition of Joy Global in a deal worth a reported $3.7 billion, if one includes Joy's debt in the sum, serves to fill some significant gaps in its competitive product line with Caterpillar. Joy Global, for instance manufactures the P&H lines of ultra heavy earthmoving equipment (power and hydraulic shovels and draglines) and open pit drilling equipment which compete directly with Caterpillar's acquired Bucyrus Erie equipment lines, while Joy's underground coal mining equipment fills a major gap in Komatsu's overall product line in terms of directly competing with its massive U.S. headquartered rival.

There have seldom been two industrial competitors which have gone head to head in so many parallel areas of the industries which they dominate. Caterpillar is already feeling the pinch a little from the strong dollar which reduces its competitiveness worldwide for many of its product lines. However Komatsu already with many of its key manufacturing plants in the U.S. - being expanded further through the Joy Global acquisition, will be suffering similar problems while its Japanese operations will be suffering perhaps even worse from an even stronger yen.

However, while the Joy acquisition perhaps brings Komatsu even more in line with Caterpillar in terms of overall size and competitiveness in product lines, the two companies have been going head to head for so many years that the competitive impact on earnings may be muted. It is perhaps the smaller manufacturers of rival equipment which may suffer most as the two big players in the market will put increasing efforts into Research and Development to further improve the capabilities of their product lines. We wouldn't be surprised to see other companies swallowed up by the world's two construction giants as the construction wars continue at perhaps an enhanced pace.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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