The next few months could see more mergers and acquisitions in the U.S. manufacturing sector as memories of recent market highs fade and some smaller companies find they need financial backing.

Executives at top manufacturers, including United Technologies Corp, had hoped the recession would provide ample opportunities to scoop up bargains this year, but were stymied when potential targets balked at selling when stock prices were testing 13-year lows.

But all of that may be changing, particularly if small manufacturers find themselves scrambling for cash when demand recovers and they need to restart production lines and bring back staff.

As volume comes back for many suppliers, many companies, this may actually be the stress point for them relative to their financing needs, Patrick Campbell, chief financial officer of 3M Co, told investors on Wednesday.

This could actually be the point where we start to see some companies that maybe become a little more distressed ... We've got our eyes wide open on that.

Industrial conglomerate Danaher Corp said on Wednesday it plans to buy two makers of scientific instruments for a total of $1.1 billion in cash, including a unit of Canada's MDS Inc and Life Technologies Corp's stake in a joint venture with MDS.

FIXATED ON THE PAST

So far this year, U.S. companies have announced $516.3 billion in deals, according to Thomson Reuters data. That is down 49.1 percent from the same period in 2008.

As potential buyers see it, the biggest roadblock to getting deals done this year has been that sellers are fixated on the past value of their shares. The Standard & Poor's capital goods index .GSPIC is down about 34 percent over the past year.

A lot of players are still hung up with their 52-week high, United Tech Chief Executive Louis Chenevert told an investor meeting this week.

The world's largest maker of elevators and air conditioners is less than halfway to the $2 billion in takeovers it budgeted for this year.

Danaher's MDS deal follows news earlier in the week that oilfield services company Baker Hughes Inc would buy smaller peer BJ Services Co for $4.8 billion; that Walt Disney Co plans to buy comic-book publisher Marvel Entertainment Inc for $4 billion, and that Internet auction house eBay Inc will sell online phone unit Skype for $1.9 billion to private investors.

This is a pretty strong indicator that (both buyers and sellers) are more realistic about multiples in this environment, said analyst Guaylon Arnic of Profit Investment Management, which owns Danaher shares, referring to the Danaher deal.

When the markets pass the anniversaries of the collapses of Bear Stearns Cos and Lehman Brothers Holdings Inc -- which triggered a sharp sell-off in equities -- history may cease to get in the way of deal flow.

As you get into the fourth quarter and first quarter (of 2010), you'll probably see the M&A environment loosen up; see companies be more willing to lay out capital for M&A, said Holden Lewis, industrial equipment, machinery and distribution analyst for BB&T Capital markets.

Companies have been chicken about using their balance sheets and using cash flows and most of them are relatively healthy.

So buyers and sellers may have an easier time agreeing on a price when their trailing 12-month profit figures reflect the worst of the recession and their year-ago stock prices date to the period early this year when markets were plumbing 13-year lows.

You get to the fourth quarter and first quarter, all of (those) numbers are awful, so the sellers will have more realistic expectations, Lewis added.