ABB is one of my holdings. I have covered it before. I like ABB for its growth and strong balance sheet. Apart from growing organically, ABB has also been acquiring companies. Acquisition can be destructive for the shareholders and the company if not done correctly. Investors need to keep a close eye on the acquisition of the companies they are holding to see if they are not getting a bad deal. Let us look at the acquisition in more details.

• ABB announces all-cash public tender offer of CHF 56 per Newave share, representing a total equity value of approximately CHF 170 million, to be unconditionally recommended by Newave’s Committee of independent members of the Board of Directors
• Offer price represents a premium of 36.0% to the volume-weighted average share price of the last 60 trading days and a premium of 22.4% to the closing price on December 9, 2011
• The three major shareholders of Newave, representing in total 45% of the voting rights and share capital, have signed separate agreements to sell their shares under the same financial conditions as offered in the public tender offer
• ABB plans to develop Newave to become a center of excellence for UPS systems

Balance sheet

We look at the balance sheet of the most recently available report (HY-2011). The company has a very good balance sheet with no goodwill/intangibles and 80.54% of the company is in equity. The company has CHF 74 million in equity.




Valuation

Let us look at the last 4 years of Newave in figures and try to come up with an estimate of the value of Newave. Newave has around 81 million in sales and 10% net margin. Since 2007, it has grown revenue from 64 million to 81 million which is a compounded increase of 6% per year (this compares favorably to the 7% growth ABB has during the last 3 years).



Using the data above let us calculate the FCF for Newave. We see that the FCF has not been negative in the last 3 years, which is a very good sign.

in CHF million	2010	2009	2008	2007
Operating CF	6.4	6.3	16	0.387
Cap Ex	0.8	3	9.8	-
FCF	5.6	3.3	6.2	-

With a payment of 170 million, ABB has paid 30xFCF.

Newave is a very profitable company with CHF 74 million in book value. ABB has paid 2.29xBV and 2.12xSales. How does this compare to ABB itself ?

	ABB	Newave
P/B	3	2.29
P/S	1.3	2.12
P/E	15.8	21.25

I would not say that ABB has overpaid too much for the acqusition. Given that what ABB plans to do with the newly acquired assets, I even think that this acquisition can be a very good deal for them.

“Newave, headquartered in Quartino, Switzerland, generated a net income of CHF 8.1 Million on sales of CHF 80.6 Million in 2010. The company was founded in 1993 and went public in 2007. Newave has established a strong market position in Europe as an innovative and successful manufacturer of UPS systems with a focus on the development and production of power protection technology, as well as on technical consultancy, maintenance and service packages. ABB plans to integrate Newave in its Discrete Automation and Motion division and develop Quartino to become a main location for ABB’s UPS systems. ABB will provide a fast, global exposure for Newave’s UPS systems and will ensure that Newave can increase the high innovation rate of its current product range.

ABB will expand into a $6 billion to $7 billion market and close a white spot in core datacenter electrification and industrial power quality. Newave is active in the medium- and high-power UPS range, which is the most attractive segment since it represents 50 percent of the overall UPS market with a yearly growth rate of 6 to 10 percent. ABB has a strong presence in industrial markets and already offers industrial UPS products. It recently acquired a majority share in the DC datacenter solution provider Validus. Combining ABB’s and Newave’s market presence and technological expertise will allow ABB to offer a complete range of UPS solutions to industrial, commercial and datacenter clients with a comprehensive alternating current (AC) and direct current (DC) solutions portfolio, reinforcing its strategic differentiation.”

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