Caterpillar Just Got Bigger…And It’s Got a New Attitude

This week we’re looking at Caterpillar Inc.’s (CAT) planned acquisition of Bucyrus International (BUCY) for $7.6 billion ($8.6 billion including debt), announced earlier this week.

Caterpillar plans to pay $92 per share, which represents a 32% premium over Bucyrus’ share price as of last Friday.   No drama, just some cash from the balance sheet, debt, and equity.  Both CEOs seem to like it, and investors, though a bit surprised, see the value in the marriage.

This deal is big, huge! It’s big for Caterpillar, which hasn’t made such an acquisition since 1980, according to Bloomberg.  It’s also one of the biggest in the mining and construction industry in the past five years. Good time to do it too: financing costs are relatively low, and Caterpillar has some spare money in the bank.

Bucyrus machines are big, literally:  Caterpillar’s CFO Ed Rapp said in an investor conference call, “While we’ve always thought of ourselves as making big machines, this acquisition takes it to a whole new level.”   So really, Caterpillar machines are pansies compared to those manufactured by Bucyrus.   Now Caterpillar is almost as tough as that caterpillar in Alice in Wonderland.  No one messed with him, even Alice.

First, let’s take a quick look at what both these companies do.  We all know Caterpillar.  Their name is on virtually everything construction-related.  When I was a kid, I recall asking my parents why the big machines on I-95 were named “Caterpillar” if they were so massive.  Pretty effective branding.

Caterpillar is the world’s number one construction equipment manufacturing company, with products including diesel and gas engines, and gas turbines and dieselelectric trains.

Bucyrus’ claim to fame is in the mining business: they manufacture equipment for surface and underground mining of everything imaginable, from coal to potash (which we know lots about thanks to BHP Billiton’s (BHP) failure).  Note that Bucyrus also manufactures aftermarket parts and offers services for its machines.  Apparently this part of the business is pretty good, and Caterpillar figures it will make a significant contribution to its revenue growth in future years.

To sum it up, Caterpillar currently makes trucks, excavators and stuff like that.  Now it will make trucks, excavators, Bucyrus shovels, Bucyrus draglines, and other stuff like that.  However, note that Caterpillar is already in the mining business: the Bucyrus deal will just make it MUCH bigger.

The deal is yet another example of the race to capitalize on growing demand for commodities and natural resources.  It’s all about emerging markets.  Caterpillar wants to expand its mining product offerings, given that coal and metal corporations are ratcheting up investment in anticipation of heightened emerging market demand.

The CEO of Caterpillar, Doug Oberhelman, said as much on Bloomberg this past week: “The mining industry is very attractive to us for the long term…with all the things going on around the globe with globalization, urbanization and demand for minerals, things in the earth, we will be strong for a long period of time.”

Why is this merger ideal? The synergies are decent: not too much overlap, but still some cost savings.  Caterpillar predicts that it will experience a $60 billion gain in sales if it capitalizes on the opportunities present in mining.  Caterpillar forecasts about $400 million annual cost savings starting in 2015.

Oberhelman has meant business since he became CEO this past July.  Since the summer, Caterpillar purchased MWM Holding GmbH, a German engine manufacturer, as well as EMB, a train locomotive producer.

So, what does it all mean? Although the deal came as a surprise (i.e. there really weren’t any rumors of “talks” between the two companies), the deal fits into the whole emerging markets, commodities boom narrative.  Let’s just hope that the potential opportunity offered by emerging market demand turns out as the pundits predict, and the trend (bubble?) doesn’t pop.

Disclosure: No positions in the stocks mentioned.