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SPX shareholder bemoans acquisition strategy

by Lou Whiteman  |  Published February 25, 2013 at 3:23 PM
stocksBoard_227x128.jpgA major shareholder in SPX Corp. is calling on that company to either improve its operations or consider a sale, criticizing the manufacturer's acquisition strategy.

Ralph Whitworth's Relational Investors LLC, which through affiliates owns 8.76% of SPX's shares, in a filing with the Securities and Exchange Commission said it believes shares of SPX are "significantly undervalued" due to the company's aggressive acquisition strategy and internal issues. The firm praised SPX's group of assets, but said the company is falling behind rivals in terms of stock performance.

"Despite the company's attractive business mix, total shareholder returns and profitability have lagged peers' due primarily to excessive prices paid for acquisitions," Relational wrote. "This growth-at-any-cost strategy destroys shareholder value by overly emphasizing revenue growth over investment returns."

Charlotte, N.C.-based SPX is a manufacturer of cooling systems, flow control products, test and measurement equipment and diagnostic tools. The company in the 12 months ended Dec. 31 generated Ebitda of $430.8 million on sales of $5.1 billion, and is valued by the market at about $4 billion.

SPX in December was rumored to have submitted a bid for Quincy, Ill.-based rival Gardner Denver Inc. valued at greater than $4 billion. Shares of the company dropped more than 10% on those reports, but recovered after talk of a deal faded. Gardner Denver is now reportedly closing in on a deal to be acquired by Kohlberg Kravis Roberts & Co. LP.

SPX in the past 18 months has committed £700 million ($1.14 billion) to acquire Glasgow, Scotland-based ClydeUnion Pumps, and reached a deal to sell its automotive service solutions business to Germany's Robert Bosch GmbH for $1.15 billion. The company was a prolific acquirer in the late 2000s, expanding its reach into new markets.

Relational in a filing called on SPX to look inward instead of focusing on deals and to work on increasing operating margins and accelerating divestment of noncore assets.

The investment firm also said it believes SPX "should focus on improving its core assets and avoid future acquisitions" unless returns on a deal compare favorably to share repurchases, and only if "they convincingly offer risk-adjusted returns" well in excess of the company's average cost of capital.

Should SPX be unable to achieve higher margins and increase its stock price, "we believe the company should explore strategic alternatives," Relational said. The firm said that while it does not have any current plans to seek board representation, it could decide to nominate director candidates depending on SPX's "execution of operational improvements and capital allocation strategies."

Tags: ClydeUnion Pumps | Ebitda | Gardner Denver Inc. | Kohlberg Kravis Roberts & Co. LP | Ralph Whitworth | Relational Investors LLC | Robert Bosch GmbH | SEC | SPX Corp.

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