Sauer-Danfoss Inc. (SHS): Industrial Giant About to Get Bigger

Complications and Legal Issues

Unlike the legal rumblings that follow most merger and buyout announcements, the current investigations feel more than perfunctory. It is worth noting that Sauer-Danfoss has traded above the $58.50-per-share offer price as recently as May of 2011. While this was a relatively brief spike, it may support the case that certain Sauer-Danfoss Inc. (NYSE:SHS) shareholders are trying to make.

Until an official breach-of-responsibility suit is filed, it must be assumed that this deal will go through according to plan. However, keen-eyed investors should watch this situation carefully for any material changes. It is entirely possible that Danfoss A/S will issue a revised bid without warning. If the company ups its offer to $61 or $62 per share, current shareholders could see an immediate return of between 4% and 6%.

Long-Term Outlook and Competitors in the Space

Assuming that the deal does go through as planned, newly-whole Danfoss A/S will find itself in a competitive position. In its European wheelhouse, the company enjoys a solid chunk of the market for its products and faces relatively little pressure from its competitors. In this part of the world, Danfoss’s main concern is likely to be a perennially weak economy.

In North America and some other parts of the world, Danfoss faces more competition. U.S.-based companies like Parker-Hannfin and Eaton Corporation, PLC Ordinary Shares (NYSE:ETN) operate in many of its core segments. For instance, Parker-Hannfin’s electromechanical controls compete directly with the microprocessor-based valves, switches and power components on which Danfoss relies to drive its sales.

For its part, Eaton is a major player in the power equipment and HVAC space. Both competitors are considerably larger than Danfoss with market values of $30 billion and $15 billion versus Danfoss’ MV of $2.85 billion.  Several other large concerns may look to encroach on the Danish manufacturer’s turf with continued improvement in the North American economy. Accordingly, Danfoss may well reduce or eliminate its U.S. presence in the coming years.

Although this deal offers latecomers virtually no premium, there is a chance that it could be revamped in the face of significant shareholder opposition. Such a move would engender a violent positive readjustment in Sauer-Danfoss’s share price and may provide risk-seeking investors with an impressive arbitrage opportunity. Accordingly, the legal developments surrounding this proposed buyout bear watching.

The article Industrial Giant About to Get Bigger originally appeared on Fool.com.

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