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Shape shifting

14 June 2017 By John Foley

A hexagon has six sides. A takeover of Swedish software maker Hexagon, at its current price, has only two: the weak financial one, and the stronger strategic one. Since the company is in takeover talks with rivals, the Wall Street Journal reported on Tuesday, it looks like the latter may win out.

Hexagon helps manufacturers design products and processes, as well as tools for mapping and measuring stuff. While growth is ticking along – thanks to the more than 60 acquisitions it has made in the last decade – there are some problems. Among them, a big shareholder and recently-retired chairman with health issues, and a chief executive, Ola Rollen, about to go on trial for insider trading, which he denies. Scouting out the possibility of a sale is entirely reasonable.

What’s not so reasonable is the price, which at Hexagon’s current enterprise value would be around 17 billion euros ($19 billion). If Hexagon can meet its own ambitious target of making 1.4 billion euros of operating profit in 2021 – double last year’s – the return on investment after tax would be just 6.7 percent, far below the company’s cost of capital, and its stated 12 percent return on capital employed. There might be cost savings, but they would have to be big. Only if a buyer could rip out costs equivalent to 15 percent of the company’s targeted 5.1 billion euros in revenue would returns hit 10 percent.

A suitor – say, Swiss engineering rival ABB – may be willing to take a long-term view. Manufacturing is in the grip of enormous changes, which point to more automation, fewer people and less reliance on cheap labour. Swedish ball-bearing maker SKF recently souped up a production line at its Gothenburg factory at the end of 2016, cutting the number of people working on it by 80 percent. The more globalisation goes into retreat, the more that trend will accelerate.

Not many companies of any size have the software and expertise that enables factories to do that. That makes technology like Hexagon’s a rich prize – or at least, creates a potential reason to overpay for a rival that wants to compete with the likes of Siemens and GE. Smart factories and smart finance may not tessellate.


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