The Company

The News

Down-on-their-luck

Diebold

United Technologies

United Technologies, the Hartford, Conn.-based industrial conglomerate, late Sunday announced a $40 a share offer for Diebold. That's a 66% premium to Friday's closing price of $24.12. Diebold's stock had lost nearly half its value over the past year.

Curbs on bank-branch openings slowed demand for automated teller machines, which account for about two-thirds of Diebold's revenue, and higher operating and manufacturing costs eroded margins over the past several years, Wedbush Morgan analyst Gil Luria said. Management has unsuccessfully sought to sell the voting machines business over the past two years.

The United Technologies proposal, posted on the company's web site, said Diebold was "an excellent fit with UTC," and that it had been interested in buying the company for two years. United Technologies Chief Executive George David said his company could fully fund the bid and would be able to streamline the turnaround of Diebold's flagging business through economies of scale and added efficiency.

"The facts are that UTC has an exceptional global footprint, deep technical resources, and an outstanding operating record," he wrote in a Feb. 29 letter addressed to Diebold Chairman John Lauer. "Failing an ability to engage in discussions with Diebold's board and management, we believe it is in your shareholders' interests to know of this proposal."

United Technologies also posted a Feb. 19 letter describing a similar offer, without specifying a price, and posted it along with the Feb. 21 response from Lauer.

"After careful consideration, our board unanimously determined at that meeting that it was not in the best interests of the corporation or its shareholders to pursue discussions with UTC regarding a business combination with Diebold. Nothing has changed since that meeting that warrants revisiting this issue," Diebold's chairman wrote.

On Monday, Diebold's board reiterated its objection to the deal. In a written statement Lauer called the bid an "opportunistic attempt" by United Technologies to get the company on the cheap.

The Analysis

Diebold's got its share of troubles, some of them self-inflicted, some products of media hype, and plenty that it simply cannot control. It's an attractive target, and the rebuffs are part of the merger tango.

"We continue to believe Diebold is undervalued based on the potential for the ATM and security businesses as it moves past the SEC issue," Jefferies & Co. analyst Yvonne Varano wrote Monday. "Given the continued weakness in the share price and the potential to leverage UTX's resources and global presence, opening discussion with UTX could be a positive for shareholders. United Technologies does have a proven history of being able to create shareholder value."

Wedbush Morgan's Luria wrote Monday that Diebold could be angling for a better offer from United Technologies, simply because it's got a longstanding interest in this acquisition.

"We believe UTX's offer for Diebold appears attractive, but that UTX can afford to pay a higher premium," he wrote, adding that "If UTX believes it can make DBD as profitable as the rest of its units, we believe it would be willing to pay more than $40." United Technologies has signaled that it may be willing to up the ante if Diebold comes to the bargaining table.

But Lauria says United Technologies may fall victim to the age-old counsel of being careful what you wish for you might get it. Bank-branch expansion has slowed outside of major cities, and its overseas markets, where Diebold has recorded recent growth, offer lower margins. There are fewer banks, and reduced competition gives them better bargaining power.

"United Technologies is coming in, saying, 'We can do this turnaround better and faster. We'd like to own and operate this business and we can do it more efficiently,'" he says. "But I think they have a harder task than they think. All the things about why Diebold isn't profitable are things they can't control."

Varano, the Jefferies analyst, wrote that the airing of the bid may bring other potential acquirers into the open, notably competitor Wincor Nixdorf, a German company.

"Wincor has been trying to build a U.S. presence with a more aggressive push recently," she wrote. "However, Wincor has lacked a strong service network to support ATM sales. Diebold is considered the premier service provider in the U.S. With Wincor having under a 5% market share in the U.S., we would not see any regulatory issues as it relates to the domestic market."

The Bottom Line

The back and forth of these negotiations will bear watching, but any merger is always a

, especially to the small investor. Nevertheless, as grim economic conditions sort out the strong and weak, hostile takeover bids will become a more frequent feature of the investing landscape, says Steven Bernard, director of M&A research at Robert W. Baird & Co.

"United Technologies-Diebold, Microsoft-Yahoo and Take-Two Interactive-Electronic Arts (click here are all examples of the same case," he says. "You have a potential acquirer doing a more or less hostile bid for a weaker competitor."

Strategic acquisitions will come into vogue in a weaker economy, because private-equity firms, which spent the boom times on a buying binge thanks to cheap and easy credit, don't have the same access to capital.

Bernard says companies with good cash flow, strong market share and less economic sensitivity will be making more offers like United Technologies' overture.

When the target is in the same shape as Diebold, there's less capability to ward off the takeover attempts, added Luria.

"We believe practically every major industrial conglomerate would be in a similar position to extract more efficiency from Diebold," he wrote.