Ingersoll-Rand Company, the Bermuda-registered, US-headquartered machinery maker, has agreed to sell its road development business unit to AB Volvo for around $1.3 billion in cash proceeds. The sale, subject to regulatory approvals and other customary closing conditions, is expected to be completed in the second quarter of 2007.

Ingersoll-Rand's road development business unit manufactures and sells asphalt paving equipment, compaction equipment, milling machines, and construction-related material handling equipment. In 2006 the division had net revenues of about $850 million, including inter-company revenues of approximately $150 million. The equipment includes large and small asphalt compactors, large and small soil compactors, large pavers, tack distributors and road widening/material transfer equipment.

With the transaction, Volvo will acquire Ingersoll-Rand's manufacturing facilities in Letterkenny and Shippensburg in Pennsylvania, USA, Hameln in Germany; Wuxi in China; and Bangalore in India, plus 20 distribution and service facilities in the US. It will also take over some 2,000 people employed by these operations. Ingersoll-Rand has a total workforce of 40,000 people.

Good fit with Volvo
According to Ingersoll-Rand's Herbert L. Henkel, chairman, president and chief executive officer, "The road development business has been a strong contributor to Ingersoll Rand's success for several decades and remains an industry leader with dedicated and talented employees. However, says Henkel, the division's markets and products "do not fit within our transformed portfolio of diversified industrial businesses".

The company plans to "transition away from capital-intense, heavy-machinery businesses" and achieve aggressive financial objectives over the long term through growth in its other businesses. Consolidation is as much a part of Ingersoll-Rand's strategy as divestitures. Recently the company completed the acquisition of the Russia-based Instrum Rand JSC, which makes pneumatic tool components and a line of tools.

Henkel's belief "that road development will benefit by joining a company sharing similar competencies and offering complementary products and services" is supported by the agreement with Volvo, a strong strategic buyer for the business. Volvo's construction equipment business, which accounts for about 17 per cent of the Swedish company's revenues, yielded operating margins of 9.6 per cent (against 8.6 per cent for its trucks business and 3.8 per cent for buses), has already expanded 17 per cent in 2006.

Volvo expects the acquisition to save it about $85.2 million in the next five years. Leif Johansson, Volvo's CEO, says the acquisition "gives Volvo Construction Equipment a world-leading position within heavy road construction equipment". Volvo, which estimates the world market for road construction equipment to be about $4 billion a year, is betting on growth driven by infrastructure investments by governments.

Volvo is also in the process of acquiring Japanese truck maker Nissan Diesel, formerly a subsidiary of Nissan Motor, which will yield significant cost savings from joint purchases with Volvo's other truck making units. Volvo also owns the Renault trucks in Europe and Renault's former US subsidiary, Mack Trucks. As part of its drive to focus on trucks, Volvo sold its car business to Ford Motor in 1999.

Volvo in India
In India, where Ingersoll-Rand has been operating since 1921, the company has plants in Bangalore and Ahmedabad. The Indian markets it serves include infrastructure development, industrial productivity, climate control, and security and safety.

Meanwhile, Volvo India Private Limited has been expanding its portfolio. Having made a big dent in the Indian commercial vehicles (truck and bus) market, the company announced in November 2006 that it would begin manufacturing construction equipment in India in three to four years, according to Mrityunjaya Singh, head of the CE division of the Indian subsidiary.

Volvo currently imports construction equipment from South Korea, Canada and Sweden. Singh said import was not a sustainable business model. Volvo's construction equipment division currently markets wheel loaders, articulated haulers, excavators and motor graders.