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Quick Take: ABB Acquires Power-One (PWER)

April 22, 2013 | About:
Chandan Dubey

Chandan Dubey

97 followers
Power One (PWER) manufactures inverters that change DC current produced by renewable energy sources (i.e. solar, wind) to AC current, which is put into the electric grids for mass consumption.

This was one of the stocks I bought on analyst recommendations at the end of 2010. I subsequently sold it at a loss of near 30% [Righting the Ship]. The reason for my selling were as follows.

The company has continually diluted shareholders by awarding stock options to its management. For example, in just 2010 the company awarded RSUs worth $10.6 million and options worth $3.8 million. For a company with market cap $493 million at the moment, this represents a significant burn rate of 2.8%! The cumulative effect shows in the share outstanding data.

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The growth is great, i.e. 14% CAGR, but the company has only been profitable since 2010 and that too seems to be a fluke in the sense that the income is going down year over year.

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VfE2YCwmid98k1HosPbUqowh0metIGSPhiN1X1XGFurthermore, the company operates in a subsidized industry. Changes in government subsidy will have adverse effect on both the business (revenue) as well as profitability.

Feed-in tariffs have been a significant driver in the growth of the solar industry, with countries throughout the world providing incentives to spur adoption of renewable energy. While many countries have adopted feed-in tariffs, subsidies, or other incentives, some are re-evaluating the level of incentives they wish to provide.
The only saving grace was the lack of debt on its balance sheet. The company has no long term debt since 2011 and has a net cash position of $266 million. But cash is no substitute for business. Hence, I bit the loss and sold the stock.

I was surprised to see the following announcement in my Google Reader news feed today.

The boards of ABB and Power-One have agreed to a transaction in which ABB will acquire Power-One at $6.35 per share or approximately $1 billion equity value, which includes Power-One’s net cash of $266 million.
The stock closed at $4 on 19 April 2013 and the offer is nearly 60% higher.

I would like to make a few comments about the transaction/merger.

Foremost, I am happy to see that this is a very good strategic fit for ABB. They have the global reach and expansion to drive the revenue of the company. Also, ABB knows the inverter business and it is one of its core markets.

It is also heartening to see that the price it paid is not outrageous. Power One has $266 million net cash on the balance sheet. So, ABB is paying $734 million for the company. With sales of $1 billio, ABB has paid a P/S multiple of 0.73 — not an outrageous sum.

Given that the company has not earned any money on the whole, i.e. it has accumulated losses of $197 million, it is not clear what the valuation should be. This is definitely not my area of competence. I don’t know about the regulatory situation and I have no idea how much it affects the profitability of Power One. This is the reason why I sold. But $734 million does not look outrageous to me, given the growth, opportunities and global reach of Power One. I would not expect the management to sell the company at a significantly lower price.

Additional Disclosure: I am long ABB (ABB).

About the author:

Chandan Dubey
I invest because I want to be free by the time I reach 40 years of age i.e., 2025. My investment style is to find a small number of bets with large margins of safety. I pay a lot of attention to management and their incentive. Ideally, I like to buy owner operator businesses. I am fortunate to have a strong inclination towards studying. I aid my financial understanding by extensive reading in psychology, economic, social sciences etc.

Rating: 3.5/5 (8 votes)

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