Emerson gave the power protection firm only two days to respond to its 275-pence-a-share cash proposal over the weekend before going public on Monday, and said its next steps would be to contact Chloride's institutional shareholders.
Shares in Chloride, whose products protect against power shortages at Heathrow's Terminal 5 and Arsenal's Emirates soccer stadium, shot up by 43 percent to an all-time high of 300 pence. The rise made them easily the top FTSE 250 riser, and indicated the market expects a sweetened offer.
Two top-10 shareholders told Reuters Chloride's management was right to rebuff the approach and said Chloride's European footprint, coupled with high barriers to entry in the industry, meant Emerson should offer significantly more.
"It's a strategic asset, a major player in Europe and it's an important piece of the jigsaw in this growth industry," said one shareholder. "Any offer would have to be substantially higher than three pounds to have any chance of success." Emerson talked to Chloride in 2008 about a 270 pence per share offer, but those talks broke down after becoming public. While lower in sterling terms, that offer would have cost Emerson more in dollars, equating to roughly $1.3 billion.
Ralph Singleton, head of research at No. 10 shareholder Montanaro, said Emerson were "not as strong as they would like to be in Europe and the exchange rates where they are now make Chloride look quite attractive."
"The barriers to entry are quite high in terms of reputation, service delivery and expertise, which probably explains the Americans haven't the headway they would've liked to make in Europe, and why they feel they've got to go down the route of making an acquisition," he added.
The offer represents a 34 percent premium to the last closing price before the approach, or 24 times expected earnings per share (EPS) for the year to end-March, Emerson said.
Analyst Scott Cagehin of Numis said take-out multiples in the sector have been as high as 30 times prospective EPS.
Seymour Pierce analyst Ian Robertson said he believed Emerson could pay up to 339 pence per share without diluting earnings in the current financial year.
But Robertson doubted serious counter-bidders would emerge, with competition problems restraining Schneider and Eaton unlikely to pay what would be a big premium to its own share price as a multiple of earnings.
Chloride said both Emerson's approaches undervalued the company and that since the original one in 2008 it had developed the business further.
"The board believes the company has better prospects as a result of the steps that it has taken in this regard," it said in a brief statement.
Emerson said it intended for Chloride to act as its European Network Power Systems headquarters and this would result in more jobs in Britain, where Emerson already employs 3,000 people across 30 sites.
David N. Farr, Emerson's chairman, chief executive and president, defended his company's proposal.
"We continue to believe in the strategic merits of a combination between Emerson and Chloride and that our indicative proposal represents an attractive premium and compelling value proposition with greater certainty for shareholders," Farr said in an email after Chloride's rejection.
Earlier Farr told reporters Emerson had gone back to Chloride because it still believed there was a clear strategic reason for a deal, and Chloride's smaller scale left it without the geographic reach needed for long-term success.
Shares in Emerson, which generates a fifth of its annual $21 billion sales in Europe, rose 0.4 percent by 1420 GMT to $52.95 a share, valuing the company at almost $40 billion.
JP Morgan Cazenove and Greenhill & Co are advising Emerson, while Chloride's advisors are Investec.
