These are good times for diversified U.S. manufacturers. So why aren't they doing more big mergers and acquisitions?
The short answer: Their very success -- and aggressive shopping by private-equity groups -- has made high-profile deal-making hard.
Strong demand for the fasteners, controls, cooling systems, sensors and other products these companies make has lifted their profits and share prices and deposited tens of billions of dollars on their balance sheets.
The strong demand has also absorbed all the excess capacity that the industry added in the late 1990s. That, together with tight availability of raw materials, has forced some producers to essentially ration the amount of goods they sell to customers.
But the conglomerates just aren't seeing the blockbuster mergers that are remaking the telecom and finance industries. In fact, not one of the 15 biggest deals announced since 2005 has been in the sector, according to data from research firm Dealogic.
Experts blamed the deal drought on a number of factors. Chief among them is the industry's awareness of its cyclical nature and an underlying worry in many boardrooms, bolstered by experience, that it's a bad idea to buy at the peak.
Also playing a role: big deals that went bad, like Honeywell International Inc.'s troubled purchase in 1999 of Allied Signal -- or the failed merger of Honeywell and General Electric Co. two years later. This has made executives much less interested in big, transformational mergers and happier to make smaller acquisitions.
There's a natural conservatism in the sector that is, to some extent, driven by cyclicality, said Jane Marlowe, a managing director at Dresdner Kleinwort Wasserstein and the head of its American industrials group.
If you deal with these CEOs, you learn not to go into their offices with big, crazy ideas that will turn them off, she said. You go in with highly strategic ideas.
But other developments, including aggressive bidding by buyout shops, are also keeping a lid on deal-making -- and even cutting into the flow of smaller acquisitions.
Once the target is large enough to attract private equity firms, it becomes all but unaffordable, Ingersoll-Rand Co. Ltd. Chief Executive Herb Henkel said at the Reuters Manufacturing and Transportation Summit in New York this week.
In recent deals, the buyout shops were able to pay as much as 14 times a target's earnings before interest, taxes, depreciation and amortization, he said. For our math to work, we were close to seven to eight, maybe 10 times (earnings).
UNDER THE RADAR
Deals are still getting done; they're just not the kind of that draw the attention of the media or most private-equity players.
Illinois Tool Works Inc. bought 22 companies with combined revenues of $600 million last year and hopes to add another $1 billion in sales through acquisitions this year. But Chief Executive David Speer says the only reason he's able to seal so many deals is that ITW is landing fish too small for the private-equity players' radar.
Of last year's acquisitions, 19 of the companies had less than $100 million in annual sales, he told the Reuters Summit.
Speer said ITW dropped out of the bidding for a number of targets in recent months because financial sponsors had driven prices up to the point where the deals wouldn't make economic sense.
It's a complaint made by many diversified manufacturers.
When Caterpillar Inc. tried to buy China's largest construction company last year, for example, it was outbid by the Carlyle Group.
We've seen (private-equity firms) offer prices that we wouldn't offer, Dinesh Paliwal, head of North American operations for Switzerland's ABB, told the Reuters Summit. So, like ITW, ABB is doing deals so modest it doesn't even feel it needs to issue press releases on them.
Repeatedly outbid at home in bigger auctions, many companies, including Honeywell, have started to look abroad, where they say multiples are much lower.
Meanwhile, manufacturers and bankers await what they believe is an inevitable day of reckoning for some of the highly leveraged private-equity deals, especially if the economy worsens.
Some of these (private-equity investors) are going to find themselves holding the bag, Dresdner Kleinwort's Marlowe said.
Marlowe and others said a shakeout could precipitate a buying spree by the conglomerates, which might be able to pick up companies on the cheap.
In the meantime, some manufacturers, like Charlotte, North Carolina-based SPX Corp., are using excess cash to buy back shares.
We are not sitting idling and not doing anything, SPX Chief Executive Chris Kearney told the Reuters Summit.
But not everyone is so sure that investors in diversified manufacturers are willing to watch the companies bide their time with buybacks and small deals.
These guys are going to have to do significant things soon, said one banker, who spoke on the condition of anonymity.
Shrinking the equity base through stock buybacks is not a management strategy, he said. It's a way of boosting shareholder value in the short term. But over the long term, it's not a strategic plan.