Large companies with lots of cash but sedate growth rates often find themselves under pressure from investors to pep up returns. ABB and Unilever both fit this description. They have responded by announcing two very different acquisitions.
Start with ABB, the Swiss engineer which on Monday said it would pay $2.6bn for General Electric’s industrial solutions division. ABB says it will eventually strip out $200m a year in costs and improve the unit’s operating margins. There may ultimately be sales growth too, as ABB fills in gaps in its North American product portfolio. But overall, the market for low-voltage electrical equipment is forecast to grow in line with the economy. If profits improve, it will mostly be because ABB runs the unit better than GE did.
Sales growth is expected to be more rapid at Carver Korea, a maker of skincare products which consumer group Unilever plans to acquire. It is paying around the same amount of money as ABB. The sellers are private equity groups Bain and Goldman Sachs, and the group’s founder. Unilever could probably trim Carver’s costs by using its purchasing power in areas like advertising. But this is not a turnaround; it is leaving Carver’s existing management in place. Margins — Carver managed 43 per cent last year before interest, tax and other deductions — are healthy, and much higher than in metal bashing. This deal is all about growth. Per capita spending on skincare in Korea has almost doubled over the past decade. Carver products are also sold, officially or otherwise, in China.
Those differences are reflected in the price. ABB is paying the equivalent of a year’s sales for GE’s unloved unit, while Unilever is forking out seven times annual revenues for its bridgehead to North Asia’s consumers.
ABB’s approach is lower risk. More factors are within its control and with such pedestrian growth, there is little prospect of competitors piling into the market for low-voltage switchgear. Unilever’s gambit depends more on continued growth in a market where consumer tastes can change quickly. Fat margins will encourage more competition. These are the gambles that company managers are paid to take. Neither approach is more right than the other. Both are better than buying back stock, the easiest but least imaginative way to boost earnings.
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