Why Toshiba paid L+G 11 times its EBIT?

by / Friday, 20 May 2011 / Published in Smartgrid-CI Blog

Usually when all goes well, when the market is promising and when the acquisition is in a good shape, investors would pay 5 to 8 times its expected EBIT (Earnings Before Interest and Tax). We do not know how much Toshiba expects to get from Landis + Gyr in the future. We only know that the Japanese behemoth agreed to buy it for 11 times its past EBIT. Toshiba shelled out $2.3B for a company that generated$215M EBIT last year. This a price an investor would pay for a very promising start up.

This alone gives an idea of how much Toshiba believes in developing with L+G sufficient synergies to recoup its investment. At this level only a « big guy » could expect to do so and it is no surprise that only « big guys » such as GE, Honeywell or ABB were, it is said, interested by this prey.
How will Toshiba make this deal work ? Very likely in building synergies with L+G in three directions. The Swiss company is the world leader in smart meters with 8,000 utility clients (electric, gas and water) in 30 countries only and Toshiba is..all over the place. Like most big Japanese conglomerates Toshiba has a knack for vertical integration and Landis+Gyr will become part of a systematic integrated « one-stop-shop » offering appproach to the market as described in this article http://www.businessgreen.com/bg/news/2072518/exclusive-landis-gyr-toshiba-plot-smart-grid. Toshiba being also fully integrated technologically, we can infer that some emphasis will be put on the technical and R&D integration of both. L+G would benefit from Toshiba’s expertise in eclectronic chips and in software or, if not available in-house, L+G will be able to leverage Toshiba’s huge purchasing power. Toshiba is not used to growing through acquisition. This « bold » move actually legitimizes what many think about the smart grid market that is expected to grow to $71B in the next decade, according to Toshiba.

http://brainerddispatch.com/news/2011-05-19/toshiba-buy-landisgyr-23-billion

Toshiba’s goal is to capture 20% of it. But Toshiba’s estimates may actually be conservative, since some other sources predicts this market to reach over $100B in the next decade.

http://www.smartgridnews.com/artman/publish/Business_Markets_Pricing_News/Smart-Grid-Market-Size-Tracking-Down-the-Truth-1469.html

No matter what, other players will benefit from this « legitimization » and other mid-size companies will become attractive to the « big guys ».  
In the smart meter area, the acquisition spree is just at a  beginning.

In the meantime, Toshiba will have to make this integration work. No doubt that, L+G being way smaller that its new owner, will be quite easy to absorb but considering the cost of the acquisition, the real challenge will be to get the best from it. No matter the size of both partners, mergers very often fail on cultural differences. Toshiba seems to be ready to give L+G a chance to live its own life within the conglomerate. This can work as long as the smart business business is booming. But at the end of the day, success will be a matter of how the Swiss and the Japanese cultures get along with each other.

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