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By Lewis Krauskopf
NEW YORK, March 21 When United Technologies Corp
paid more than $16 billion to buy plane parts-maker
Goodrich Corp about two years ago, the U.S. conglomerate's
biggest-ever takeover raised some eyebrows for its rich
But that is nothing compared to what a buyer would need to
cough up today for Rockwell Collins Inc, a similar
airplane components maker deemed by Morningstar to be one of the
most likely takeout candidates in the industrials sector.
While United Tech paid 12.4 times Goodrich's trailing
operating earnings at the time, according to Thomson Reuters
data, Rockwell's shares now trade at about that level, without
any deal premium baked into the price. Takeout premiums among
industrials companies averaged about 25 percent last year.
Such is the dilemma facing United Tech, 3M Co,
Honeywell International and other diversified
manufacturers that are eager to bolster their businesses through
deals and yet may hesitate as the rising stock market drives
"There are a lot of companies that want to do deals," said
Jeff Sprague, managing partner at Vertical Research Partners,
which focuses on the industrial sector. "The question will be
can they really get them done. They've been reluctant to pull
the trigger because of high valuations, and they've only gone
The valuations for the broadly defined industrials sector
have climbed on average from 8 times forward EBITDA to 10 times
in the past 18 months, said Michael Santini, global head of
Deutsche Bank's industrials group.
"As the equity markets have driven multiples higher across
the industrials sector, we have seen a pick-up in IPOs and
spin-offs, but more challenges in getting M&A deals announced,"
ACTIVISTS FORCE 'DISCIPLINE'
Competition from private equity firms, with easy access to
capital due to low interest rates, has also buoyed prices for
industrials targets. For example, Carlyle Group LP agreed
to buy Illinois Tool Works' industrial packaging unit
last month for $3.2 billion.
Many analysts are predicting an increase in deals this year
in the industry after a lull in 2013. But high prices will cause
companies to pause before striking, as a risky deal could anger
their shareholders or even draw an activist investor. The safe
route might be to use that capital to buy back shares or
Take SPX Corp : After the industrial machinery
maker's failed $4 billion bid for rival Gardner Denver in late
2012 sent SPX shares tumbling, activist fund Relational
Investors bought a big stake.
"In this environment we are seeing equity investors focused
on making sure that companies are being disciplined around
capital allocation, both institutional shareholders but also the
activists are providing some of that discipline," Santini said.
At the same time, companies will look closely at deals if
they feel they will struggle to grow on a standalone basis.
Multi-industry companies posted sales increases of 3.7
percent on average in the fourth quarter, only "modest
improvement" compared to the third quarter, according to William
Blair analyst Nick Heymann.
"If you can't get it organically, what are you going to do?
You're going to have to go buy it," Heymann said.
RIPE FOR A PICKUP?
Industrial companies reorganize through deals, which allow
them to obtain growing products, realize cost savings and find
other ways to augment their central businesses.
Such reshaping can include sales or spinoffs by the
companies themselves, often in response to investor pressure, to
focus on their central businesses. Dover Corp made such
a move earlier this month with its spin-off of microphones maker
Knowles Corp, while General Electric is exiting
its private label credit card business.
Globally, acquisitions by all industrial companies slipped 8
percent last year, more steep than the 6 percent overall decline
for global deals, according to Thomson Reuters data.
The value of acquisitions by 10 U.S.-based multi-line
industrial companies fell last year to the lowest level since
1998, according to Thomson Reuters data.
"M&A is a core part of what industrials do and that's how
they optimize their portfolios over time," said Kevin Toney,
senior portfolio manager with American Century Investments. "My
sense is the buyers wanted to buy, but maybe the prices just
Because of the diverse lines of business for these
manufacturers, potential targets exist in numerous sectors,
including aerospace, security or climate control systems,
healthcare products or electrical equipment.
Certainly, conditions look ripe for a deal pickup in many
Analysts at Citi Research noted recently that among
multi-industry companies, net debt stands at "attractive lows"
of only 17 percent of total capital.
"The sector currently holds ample firepower for strategic
deals, with a willingness to pull the trigger once the M&A
climate improves," Citi analyst Deane Dray wrote in a research
note earlier this month.
The lofty level of the stock market also could be a benefit
to potential acquiring companies.
"The average buyer has a stock that has gone up a lot so
they have a lot of currency," said Scott Davis, an analyst at
Barclays. "I think we're going to see a lot more transactions
There is no shortage of eager buyers.
Honeywell's Chief Executive Dave Cote said at the
conglomerate's investor day earlier this month that the company
was planning on $10 billion in deals through 2018, more than
double what the company spent the previous five years.
3M has expressed a willingness to spend "multi-billion
dollars" on individual deals, more than it has in the past, as
it eyes $5 billion to $10 billion in acquisitions through 2017.
Danaher Corp, which has cited $8 billion in "M&A
capacity," is among the other companies expected to be on the
prowl this year.
United Technologies last week became the latest company to
make noise about bulking up through acquisitions.
Not yet two years removed from closing its Goodrich deal,
executives said they did not foresee an acquisition anytime
soon. But United Tech has set a target of $50 billion in revenue
for its commercial buildings segment by 2020, recognizing that
about $8 billion of $21 billion needed for that goal might have
to come from acquisitions.
United Tech's targets could include security companies
Allegion and Tyco International, and electrical
and lighting systems company Hubbell Inc, according to
"We have demonstrated that we do very well on large deals,"
United Technologies Chief Executive Louis Chenevert told the
investor conference, adding: "Some of you thought I overpaid on
Goodrich. I don't think anybody thinks I overpaid today on
(Additional reporting by Soyoung Kim in New York; Editing by