Chief Executive Officer David Farr is focusing Emerson Electric Co. (EMR:US) on four businesses with worldwide growth potential while shrinking his most profitable unit: the maker of wet-dry vacuums and InSinkErator disposals.
Farr said he considers network power, climate technologies and process management to be “global franchises,” and he wants to expand the industrial automation division to the same level. Businesses in the commercial and residential solutions unit (EMR:US) can’t compete as well on a worldwide basis, he said.
“They’re going to be good businesses,” Farr, 57, said in an interview at Emerson’s St. Louis headquarters. “You’re just going to have a small position in them, or over time you may move out of it.”
Farr has shrunk sales at the commercial and residential solutions unit by half since 2008 while expanding into network power to hitch the company’s future to the world’s growing reliance on computing.
Emerson, which was founded in 1890 as a manufacturer of electric motors and fans, sold its motors and appliance controls business to Nidec Corp. in 2010 and this year is shedding a tool-storage company called Knaack. Farr compared the businesses left in commercial and residential solutions, which include ClosetMaid organizers, to the company it sold to Nidec.
“If you can’t compete on a global basis today, it’s hard to sustain a value proposition for a long, long term,” Farr said. “It’s just like the appliance-components business, you moved out over time.”
The unit posted sales of $1.84 billion in the fiscal year through September 2011, or about 7.6 percent of Emerson’s $24.2 billion in revenue. When Farr took over 12 years ago, it made up 24 percent of total sales.
The businesses are the most profitable for Emerson. For the first nine months of fiscal 2012, commercial and residential solutions had profit margins of 21 percent, compared with 19 percent for the process unit and 9 percent for network power.
Farr said he’s working to expand the global reach of industrial automation, which posted a profit margin of 17 percent in the nine-month period and makes factory equipment from conveyor-belt motors to welders that join plastic parts. The unit gets 67 percent of its sales from the U.S., Canada and Europe.
“I think we can create Industrial Automation into a global franchise, but we haven’t done it yet,” Farr said.
To keep building the four focus businesses, Emerson is making small acquisitions, Farr said, such as a refrigerated- container controls business from Johnson Controls Inc. in April. Concern that global growth is slowing has made companies cautious about larger purchases, he said.
“We’re all looking for deals but there’s not a lot out there at this point in time,” Farr said. “Until you get some clarity at what’s going to happen in the global world on growth, the big deals are going to be fewer and fewer and far between.”
Emerson’s talks earlier this year to acquire Invensys Plc (ISYS), a British maker of metering equipment and railroad signaling, fell through. Emerson has been looking at Invensys on and off for 15 years, Farr said.
“What we’re interested in is clearly the process business,” he said. Farr described Emerson as a “major player” in process, where the company makes instruments that measure the flow and composition of fluids. It also produces valves to regulate fluid flow for industries including oil, gas, food and beverages.
Invensys has “a unique position there,” he said. “We’ll continue to look at that. I still think there’s going to be consolidation in this industry.”
Invensys fell 0.8 percent to 239.5 pence in London, erasing earlier gains. Emerson dropped 1.7 percent to $49.84 in New York, paring this year’s advance to 7 percent.
Farr has said he’s pushing to improve performance at the network-power unit, where profit has declined on a year-to-year basis for the past seven quarters. The CEO spent a combined $2.7 billion in 2010 and 2009 for Chloride Group Ltd. and Avocent Corp. to expand the division’s services for data centers.
Sagging profits at embedded power, which sells products such as chargers for mobile phones, have dragged on the larger unit. Part of the reason is because of “technology shifts” that have caused turmoil for customers (EMR:US) such as Hewlett-Packard Co. (HPQ:US), Dell Inc., Cisco Systems Inc., Nortel Networks Corp. and Research In Motion Ltd. (RIM), Farr said.
“I think the turmoil, I think the uncertainty and I think the change in technology are going to create a situation where we’re going to have to play something different, and we’re going through that process now,” Farr said.
Farr reiterated that he will announce a decision by the end of the year on his effort either to turn around embedded power or divest it. For now, the profitability is improving, he said.
“It’s a business that’s obviously hurting, but it’s not killing me,” he said.
To contact the reporter on this story: Thomas Black in Dallas at firstname.lastname@example.org
To contact the editors responsible for this story: Ed Dufner at email@example.com