REFILE-DEALTALK-US firms eye M&A to buy growth in slow economy

Mon Aug 23, 2010 5:59pm EDT

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* CEOs of 3M, Caterpillar interested in more deals

* Big cash balances drive takeover talk

* Tepid recovery has some companies looking to buy growth

* Surge of deals in one of the busiest August on record

By Scott Malone and Soyoung Kim

BOSTON/NEW YORK, Aug 23 (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 of 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 (BLT.L) making a hostile $39 billion offer for No. 1 global fertilizer supplier Potash Corp (POT.TO), chipmaker Intel Corp (INTC.O) agreeing to pay $7.7 billion for security software maker McAfee Inc MFE.N, and tech giants Hewlett-Packard Co (HPQ.N) and Dell Inc DELL.O sparring over data storage company 3PAR Inc (PAR.N).

An unusually active August could be just the start of a pickup in mergers and acquisitions, based on recent CEO comments.

3M Co (MMM.N) 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 on Monday [ID:nTOE67M07U]. "It could be double that number by the time the year is out."

Fellow blue-chip Caterpillar Inc (CAT.N) 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 .SPX 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 CHLD.L, Emerson Electric Co (EMR.N) 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 Chang)

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