By Jui Chakravorty Das
CHICAGO (Reuters) - Large industrial companies aim to pick up the pace of deal-making this year as the credit crunch forces private equity firms to retreat, making more assets available at cheaper prices.
As lending markets remain tight and investment banks absorb the fallout from mortgage losses, private equity firms are now having a hard time borrowing money to make acquisitions.
"Prices were getting ridiculous," Dave Cote, chairman and chief executive of Honeywell International Inc (HON.N: Quote, Profile, Research, Stock Buzz), told reporters at the Reuters Manufacturing Summit. "That's changed. Prices have become much more reasonable."
Interest from private equity firms -- who buy and sell companies using money raised from institutional investors such as state pension funds and college endowments -- had pushed takeover prices sky-high.
"Prices are coming down and a lot of public companies will be much more active acquirers," said Wayne Titche, chief investment officer at investment firm AMBS Investment Counsel. "Once sellers accept the new (lower) prices, you'll see a significant spurt in activity."
Cote said Honeywell would likely buy a few companies in the aerospace and automated control systems sectors in 2008, after pulling back from acquisitions a year ago due to high prices.
"Maybe there is a recognition now that things were frothy and people are not going to get those prices anymore," he said.
Private equity companies typically aim to hold a business they acquire for a few years, cut costs and then resell them at a profit.
Of a record $4.3 trillion in global merger activity in 2007, private equity accounted for nearly 16 percent. That number is widely expected to drop this year, with takeovers no longer fueled by easy access to credit, opening up avenues for corporations, or "strategic buyers" as they are known.
EXIT SALES
Illinois Tool Works Inc (ITW.N: Quote, Profile, Research, Stock Buzz) Chief Executive David Speer said the company's acquired revenue could top $1.2 billion in 2008.
In some cases, the buyout firms that bought a company a year or two ago may be turning around to sell the target, in deals called "exit sales."
Speer said larger assets could also become available due to exit sales, allowing ITW to do larger deals than its average acquisitions of about $25 million each in the past two years.
"The lack of larger deals has been primarily impacted by private equity and what they've done with valuations," Speer said. "I would expect that with the change in their leverage and cost of funds that that would change going forward ... valuations would decrease."
In 2007, ITW made 50 small acquisitions, paying 7.5 times earnings before interest, or EBITDA -- a measure of cash flow -- for that group of businesses. Continued...
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