What happened
Shares of scientific software maker National Instruments (NATI) soared 9.7% through 1 p.m. ET on Wednesday -- but if you want to buy into this rally, you had better act quickly. The stock is flying today because the company is being bought out.
So what
This morning, National Instruments rival Emerson Electric (EMR -0.54%) announced it has signed a "definitive agreement" to acquire National Instruments for $60 per share in cash -- or $8.2 billion in total.
Emerson noted that National Instruments did $1.66 billion in business last year, which results in a price-to-sales (P/S) ratio of 4.9 on the acquisition -- or roughly twice the valuation of Emerson's own shares (which sell for a P/S ratio of 2.5). Curiously, Emerson appears to be willing to pay this very high premium for an inferior business.
At last report, Emerson was earning a powerful 18.3% operating profit margin on its revenue, while National Instruments' operating margin is a relatively modest 12.1%.
Now what
If you're a shareholder of National Instruments and a better company is offering to pay a premium to acquire your shares, the best advice is probably to accept the offer. That's what National Instruments itself is doing, and it's probably a good idea for shareholders to follow suit.
I'm not entirely certain I'd want to stick with Emerson as the new owner of National Instruments. Although at less than 18 times earnings, Emerson stock doesn't look obviously overpriced, the company is carrying a heavy debt load -- $8.1 billion net of cash on hand.
The good news is that Emerson probably won't be going deeper into debt from buying National Instruments, since it plans to use the proceeds from the sale of its majority stake in Climate Technologies (which should close in the second quarter) to pay for its new purchase. But even so, the existing debt is still a concern.
Either way, you don't need to make a decision right away. According to Emerson, it's not expecting this transaction to close before the first half of fiscal 2024, giving you at least eight months to make up your mind about what you want to do.
