* Eaton makes splash with $11.8 bln Cooper deal
* Heavyweights GE, Honeywell pull back from big deals
* Risk of "unintended consequences" in large takeovers
* Smaller players need to bulk up or get squeezed
By Scott Malone
BOSTON, May 21 Burned by the memory of deals
gone bad, top U.S. conglomerates including General Electric Co
and Honeywell International Inc have backed away
from big acquisitions, saying the risks of $10 billion takeovers
aren't worth it.
That is leaving room for smaller, hungrier rivals to move
in. The latest example is Eaton Corp, which on Monday
made an $11.8 billion bid for rival Cooper Industries Ltd
- no small feat for a company with a $14.3 billion
Investors say the move, and a similar effort by Pentair Inc
to double in size by buying the flow-control unit of
Tyco International Ltd, carry considerable risks but may
be necessary gambles.
"Big deals don't tend to work out the way people think.
There are a lot of unintended consequences of these things that
you don't realize until you get into the middle of them," said
Peter Klein, senior portfolio manager at Fifth Third Asset
Management in Cleveland, Ohio, with funds holding a range of big
industrial companies including GE, United Technologies Corp
and 3M Co.
That is a lesson known all too well by Honeywell Chief
Executive David Cote, who spent the past decade at the helm of
the company cleaning up turf battles that were the aftermath of
Honeywell's 1999 acquisition by AlliedSignal.
BIG GUYS PLACE SMALLER BETS
Cote has looked at large acquisitions in his time at the
helm, but has never been sure the risk was justified, he told a
conference in Florida on Monday.
"Over 10 years I've never really been able to find a big
deal as in the $10 billion to $20 billion range that really made
a lot of sense," Cote said. "Every time I've looked at it,
saying, 'Could we do it? Maybe. But I'd be better off placing
ten $1 billion bets than one $10 billion bet.' Usually that's
where I've come out."
That in part reflects the conservatism needed at the helm of
a company with $43.03 billion market capitalization and $38.56
billion in forecast 2012 revenue, analysts said.
"He wants a deeper keel underneath his share price," said
Nicholas Heymann, an analyst at William Blair & Co who covers
the industrial sector.
Cote's conservatism is shared by Jeff Immelt, CEO of GE, who
has also repeatedly told investors this year that he has no
interest in pursuing big acquisitions.
"I just don't want to do a big deal this year," Immelt said
in an April conference call. "We might do a few small bolt-on
acquisitions in businesses we are already in."
Immelt has come under criticism for some large deals early
in his term as CEO, particularly a $9.5 billion buy of British
healthcare equipment maker Amersham.
The largest U.S. conglomerate has a slightly different idea
of what constitutes a "big deal" than some of its smaller
rivals. With a $200 billion market capitalization, GE sees $2
billion to $3 billion targets as reasonably sized.
After an $11 billion spree of deals of that size in the
energy sector following last year's sale of a majority stake in
NBC Universal media to Comcast Corp, GE has focused on
turning over more cash to shareholders through higher dividends
and share buybacks.
To be sure, not all blue-chip U.S. manufacturers are shying
away from mega-deals. United Tech this year aims to close its
$16.5 billion takeover of Goodrich, the largest deal in
the company's history.
DIFFERENT SIZE, DIFFERENT RISKS
Investors said smaller companies have clear motivations to
pursue large takeovers; while there is risk in the deals, there
is also risk in being outmaneuvered by larger rivals.
"For the little guys, it's either get squeezed or bulk up
and have a seat at the table," said Peter Sorrentino, senior
vice president and portfolio manager at Huntington Asset
Advisors in Cincinnati.
And as more of their growth opportunities are coming from
outside the United States, companies like Eaton, which makes
electrical equipment, and Pentair, a supplier of water filters
and pumps, need to provide a wider range of products to win
bids, Sorrentino added.
Pentair's acquisition of Tyco's flow control unit will
roughly double the company's revenue to $7.7 billion, while
Eaton's deal for Cooper will grow its top line by about $5
billion to north of $21 billion.
"Look at the projects that are being done around the globe:
They have to have the kind of scale and gravitas that will make
them a credible bidder," he said. "Siemens, Hitachi and some of
other rivals just dwarf them."
Eaton CEO Sandy Cutler said buying Cooper would give the
company a "larger continuum" of electrical products and services
"It's a transformative deal," Cutler said.
The combination of slow growth in U.S. markets and low
interest rates is also fueling smaller companies' desire to do
large deals, said Fifth Third's Klein.
"It speaks to me of limited growth prospects, so folks are
stretching a little bit to align themselves with what they see
as a good growth opportunity," Klein said. "And financing is