The investment column: The logic behind Invensys tie-up remains to be proved

LORD MARSHALL, chairman of Invensys, the engineering giant formed from February's merger of BTR and Siebe, yesterday said the group's first annual results demonstrated the "compelling industrial logic" of the tie-up.

Quite a claim, given that the accounts contain just seven weeks of the combined companies' figures. The results confirm the merger's cost savings, but its logic remains to be proved.

Siebe and BTR were struggling to deliver organic growth in mature and competitive markets. Talk of consolidation was already in the air when the Asian crisis prompted the merger.

Last year, all of the Invensys divisions experienced declining or flat organic growth - a 2 per cent drop in organic sales overall - evidence that if you merge two poorly performing companies you end up with, initially, one big poor performing company.

So Invensys is struggling to boost margins through cost-cutting. Six thousand people have gone. A further 5,000 face the chop. Fifty offices and plants have closed; another 100 are to go. The drive helped lift pre- tax profits 12 per cent to pounds 998m. The target is to cut costs by pounds 300m annually. But soon it will be impossible to take costs down further.

No surprise then that its chief executive Allen Yurko is emphasising Invensys' intention to boost by acquisition its electronics and software activities from 35 to 47 per cent of the business. These growth markets are a sensible route for the group's pounds 3bn firepower for acquisitions. Invensys' purchases in this area have performed well.

Less compelling is the suggestion that Invensys will be re-rated just by switching, as it intends, to the electronics sector. And if this is where the action is, why did Siebe storm in and buy BTR, a controls group? Moreover, Invensys will have to complete its pounds 1.8bn disposal programme to widen its options.

In the last year, Invensys' largest divisions, intelligent automation and controls, experienced weak markets. Going forward, all divisions are sure of healthy markets only in the US. Yet Invensys emphasises that it is a global business and assumes it can deliver 5 per cent organic growth if its markets recover.

On analysts' forecasts of pounds 995m post-exceptional pre-tax profits and earnings of 18.1p per share this year, rising to pounds 1092m and 21.5p in 2001, the shares are on a forward price-earnings ratio of 17. For a company mid-way through restructuring which can guarantee growth only by acquisition, such a rating is more than fair.

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