Why Shares in National Instruments Soared This Week

What happened 

Shares in software-connected automated test and measurement company National Instruments, or NI (NATI +0.00%), rose more than 10% in the week to Thursday morning, according to S&P Global Market Intelligence. 

There are no prizes for guessing the reason for the move. On Wednesday, NI's suitor, Emerson Electric (EMR +0.48%), announced it had reached a definitive agreement to acquire the company for $60 per share in cash, valuing the company at $8.2 billion. 

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NASDAQ: NATI

National Instruments

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So what 

As previously discussed, Emerson Electric was the likely winner out of the bidding process. It operates in one of the four key markets (industrial software, factory automation, smart grid solutions, and test & measurement, where NI comes in) that Emerson is targeting as its CEO, Lal Karsanbhai, restructures the company toward becoming a pure-play automation company.

Image source: Getty Images.

Moreover, unlike other potential bidders like Fortive and Keysight, Emerson has the financial firepower to finance the deal -- including $8 billion from the sale of a majority stake in its climate technologies business.

Emerson's management believes NI has leading technology in high-growth areas, and its products command high gross margins. However, it also believes it has an opportunity to cut both NI's research & development costs and selling, general, and administrative (SG&A) costs as a share of revenue. In doing so, Emerson aims to improve NI's profit margin.

Now what

After telling analysts that Emerson would "be the purchaser of the asset" if NI insisted on anything not below $60, Karsanbhai later agreed to $60, or if you want to split hairs, an effective price of $59.61. (Emerson had already accumulated 2% of NI's stock in preparation for its approach.)

As such, NI shareholders can be happy that its management has extracted good value for the deal, which is expected to be completed in the first half of 2024. Meanwhile, the deal makes good strategic sense for Emerson Electric, provided it can deliver on the $165 million in targeted cost synergies.