On Monday, Eaton Corporation (ETN) announced a deal to acquire Cooper Industries (CBE) for cash and stock worth $11.8 billion. The offer of $72 per CBE share represented a 29% premium on Cooper's shares at the time of the deal.
It will not take long to recoup the cost of the acquisition.
Although paying the 29% premium on the shares may look expensive on the surface, looking at Cooper's annual financials shows that it is reasonable to assume $630 million per year net income annually. If this continues, the cost of the acquisition will be completely covered in approximately 16 and a half years. This will probably be covered quicker considering that Cooper is in the electrical industry, which is growing with the improving economy, and that the integration of Cooper into the Eaton framework is estimated to improve productivity on both sides by 2014.
This looks like a great acquisition next to Facebook's (FB) acquisition of Instagram for double its value, which probably will never pay for itself. Compare it also to an even bigger deal made by Google (GOOG) recently of Motorola Mobility (MMI) for $12.5 billion. Motorola Mobility has not generated positive income since December 2010. Good luck making that deal worth the money.
The move gives the company a tax break by moving the HQ to Ireland.
By moving headquarters from Ohio to Ireland, they will benefit from the corporate tax rate of 12.5%. This is where Cooper has its headquarters, and it will save them around $160 million annually. Eaton has been wise with its taxes, and has reduced its U.S. tax rate close to 20% from 35%, but there is fear that the closing of some tax loopholes may increase the tax burden. Moving to Ireland will effectively reduce taxes substantially.
Eaton's stock continues to provide stability through a substantial dividend.
Over the years, Eaton has proven that it is committed to rewarding shareholders by paying a consistently generous dividend. Eaton remains on my list of best dividend paying stocks. Currently, the yield of Eaton is 3.6% after they raised the quarterly dividend 12% to .38 per share in January.
There is considerable upside to Eaton's stock.
Considering the stock is down about 20% off of its high after reporting a pretty strong quarter, this stock has room to move upward. The decline has been triggered by fear of a European collapse and new weakness seen in the growth rate of China. I feel the stock price is low enough that it is currently a bargain, which is only increased by the acquisition of Cooper. Hovering currently around $42 per share makes this stock a buy and should be held for great long term gains.
Disclosure: I am long ETN.