By Scott Malone and Soyoung Kim
BOSTON/NEW YORK (Reuters) - Faced with a slow crawl
out of recession, some top U.S. companies have begun to talk up
their interest in making acquisitions, saying low valuations
make this the right time to invest a bit their big cash piles.
That's not necessarily good news for the economy, though.
It suggests companies see limited opportunities to grow sales
at their existing businesses and will be likely cutting jobs at
the companies they buy, investors said.
This month has been the busiest August for deal-making
since 2007, with Britain's BHP Billiton making a
hostile $39 billion offer for No. 1 global fertilizer supplier
Potash Corp, chipmaker Intel Corp agreeing to
pay $7.7 billion for security software maker McAfee Inc
, and tech giants Hewlett-Packard Co and Dell
Inc sparring over data storage company 3PAR Inc
An unusually active August could be just the start of a
pickup in mergers and acquisitions, based on recent CEO
3M Co could spend about $2 billion on acquisitions
in 2010, double its initial estimate, as the U.S. maker of
Scotch tape and Post-It notes looks to bolster its overseas
operations, its top executive said.
"We told Wall Street that we would spend probably a billion
dollars or north of that, but I suspect that it will be
somewhat higher," CEO George Buckley said in an interview
Monday. "It could be double that number by the
time the year is out."
Fellow blue-chip Caterpillar Inc is also keen to
spend, its new CEO told investors last week.
"We have cash. We have a strong balance sheet. We can do
some things at this stage that in past recessions, we couldn't
do," said Doug Oberhelman. "We intend to use the strength of
our balance sheet in a big way to take advantage of that while
we can at this early stage of recovery from the recession,
while valuations and prices are right."
Both those companies are on track to report significant
growth in profit this year, after notching declines in 2009,
helped by last year's cost cutting. Their interest in deals may
reflect concern that they won't be able to continue growing
profits without new sources of revenue, investors said.
"Most people are assuming that top-line growth is going to
be very hard to come by," said Peter Klein, senior portfolio
manager at Fifth Third Asset Management in Cleveland. "CEOs are
thinking, 'We're not going to be growing a lot. We have a lot
of uncertainties out there and we're getting a good price."'
BIG CASH PILES
After seeing short-term credit markets grind to a near halt
in late 2008, corporate America began guarding its cash more
jealously. That continued through the early phases of the
recovery, meaning that by the end of the second quarter, cash
reserves at the companies that make up the Standard & Poor's
500 index were 13 percent higher than a year earlier,
according to Thomson Reuters data.
With the credit markets on the rebound, CEOs are now
looking for ways to use some of that money.
"Given current interest rate levels, cash sitting on the
balance sheet is actually dilutive, it's not earning anything,"
said Paul Parker, head of global mergers & acquisitions for
Barclays Capital in New York.
Companies that take over the right targets may be able to
build their presence in higher-growth sectors. Caterpillar, for
instance, aims to focus its takeovers on the mining, energy and
equipment services sectors, Oberhelman said.
"For the CEOs who have got the financial firepower and have
cash on the books, it makes sense," said Peter Sorrentino,
senior vice president and portfolio manager at Huntington Asset
Advisors in Cincinnati. "Going forward, growth is going to be a
prized commodity in a slow-growth world."
Not all CEOs are eager to boost their takeover budgets.
After agreeing to pay $1.5 billion to buy British power
supply systems maker Chloride Group PLC, Emerson
Electric Co CEO David Farr sought to assure investors
that he planned no buying binges. He said the company will
spend just $500 million on takeovers next year, down from about
$3 billion in 2010.
While an overall pickup in the pace of takeovers may help
boost corporate revenue -- and could be very remunerative for
the bankers and lawyers who do the deals -- it will do nothing
to help the United States tackle its stubbornly high
unemployment, as one of the first things an acquiring company
will look to do is eliminate back-office jobs.
"Cuts are one of the ways an acquisition pays for itself,"
Fifth Third's Klein said. "That's worrisome."
Still, shareholders of companies that are going out on the
takeover trail now may benefit if the economic recovery does
pick up steam.
"There is definitely a first-mover advantage in the
cyclical upturn," said Barclays' Parker. "So some of the most
experienced M&A names in the business are being aggressive and
moving quickly, which is what they should be doing."
(Reporting by Scott Malone and Soyoung Kim; Additional
reporting by Nick Zieminski in New York; Editing by Richard