More risks than rewards from M&A

CHICAGO Thu Feb 26, 2009 2:06pm EST

1 of 2. Nordson CEO Ed Campbell speaks during the Reuters Manufacturing Summit in Chicago February 25, 2009.

Credit: Reuters/John Gress

CHICAGO (Reuters) - Plunging stock prices may make companies look like relative bargains, but for right now manufacturing companies see more risks than rewards in corporate deal-making.

Executives at the Reuters Manufacturing Summit in Chicago this week stressed that the economic uncertainty and lack of access to capital that have defined the recent downturn make acquisitions difficult to complete and even harder to sell to shareholders.

Manufacturing deals ground nearly to a halt after the credit markets froze up -- deal volume in the sector fell 85 percent in the fourth quarter of 2008, according to PricewaterhouseCoopers. It has been very slow in the first quarter as well.

"This is a time period that I'm not prepared to expose the shareholders to that type of risk ... and there's nothing out there that we need to do," said Ed Campbell, chief executive of Nordson Corp (NDSN.O), a maker of equipment that dispenses adhesives and coatings used in manufacturing and consumer products.

Moreover, in the current environment, shareholders have been rewarding companies for liquidity more than growth prospects, meaning companies could be punished for making acquisitions.

Campbell said he had been approached by investment bankers twice for the same assets, which he believes indicates that the level of interest from possible buyers is still low.

"Some of those have been interesting to us but we've walked away," he said. "Now is not the time to use that dry powder."

Executives said the lack of cheap credit is keeping them out of the market for deals.

"There is no liquidity," said Terex Chief Executive Ron DeFeo. "So you have to manage with the attitude that you are not going to get liquidity for a while. And until that becomes clear, be careful not to venture out too far."

Still, the heavy equipment maker is looking for possible buyers for its construction and road building units. DeFeo said that his job over the next nine months will be to "fix, merge or sell those units."

SELLERS ON THE LOOKOUT

While manufacturers are reluctant buyers, possible sellers have started to look for partners, especially as the economy takes its toll on their operations.

Companies currently on the market are "not so much sellers as opposed to people that have gotten caught up in this credit crisis," said Ed Rapp, a group president at Caterpillar Inc. (CAT.N)

"If there are opportunities that develop out of this thing, I think it's going to be people who don't have an investment-grade rating, so their access to the market in terms of raising funds is limited; who have got significant rollover in terms of debt coming in the near term; who don't have the cash to survive this downturn."

One reason deals have become difficult to complete is that struggling companies have yet to adjust to the new reality that their businesses are worth much less than a year or two ago.

"It's too easy to remember the company value or share price that existed at the end of 2007 or early 2008, and so if you are in that position and you are a potential seller, you are not likely to have reduced your expectations too much," General Electric (GE.N) Vice Chairman John Rice said.

But equities can fall only so far before well-capitalized companies start to notice that targets they had eyed previously are relatively cheap.

"When equities reach the level they've reached, it does create opportunities," said Charles Peters, senior executive vice president of Emerson Electric Co (EMR.N). "We are fortunate ... to have the financial capacity to make investments. It's probably easier to be proactive in this environment."

Robert Bertagna, a high-level Barclays Capital (BARC.L) investment banker, believes that merger and acquisition activity could pick up in the manufacturing sector over the second half of the year.

"We are a seeing a number of large, well-capitalized companies that are looking much more closely at acquisitions today than, say, four or five months ago," he said.

"They are clearly putting certain companies in their gun sights and feeling a little more comfortable that now may be the right time."

(Reporting by Michael Erman, editing by Matthew Lewis)