U.S. industrial executives hungry for small aquisitions

(Reuters) - After a weak six months for mergers and acquisitions, U.S. manufacturing executives are predicting a pick-up as industrial companies look for deals to drive growth at a time when major economies are expanding slowly at best.

While concerns about Europe and the global economy dull interest in big mergers, U.S. industrial conglomerates are looking for smaller, bolt-on acquisitions, encouraged by large cash stockpiles, low borrowing costs and relatively cheap stock market valuations.

Other factors nudging buyers and sellers closer are: a possible rise in capital gains taxes in 2013 if tax cuts expire; and the disappointing Facebook Inc (FB.O) public offering, which makes stock sales less attractive.

And because the U.S. economy is looking relatively healthy and wages are rising in China, there is more of a push to manufacture close to the U.S. market. Such so-called "nearshoring" can be achieved, in part, via M&A.

"The appetite remains very, very high," Honeywell International Inc (HON.N) Chief Financial Officer Dave Anderson told an investor conference this month, adding the conglomerate evaluates hundreds of potential deals each year.

Consolidation among electrical products makers likely reached an inflection point with Eaton's (ETN.N) deal for Cooper (CBE.N) and ABB's (ABBN.VX) purchase of Thomas & Betts, Vertical Research Partners analyst Jeff Sprague said. Electrical products company Hubbell (HUBb.N), lighting maker Acuity Brands (AYI.N) and British engineering group Invensys (ISYS.L) are all potential targets, he said.

In the flow control business that includes pumps and valves for energy and water markets, Crane (CR.N), Sulzer (SUN.S), Weir (WEIR.L), Gardner-Denver (GDI.N) and Flowserve (FLS.N) could be either acquirers or targets, Sprague said.

Among other names, analysts have identified Emcor (EME.N), Stanley Black & Decker (SWK.N), Circor (CIR.N), and Robbins & Myers (RBN.N), as potential targets.

'VALUATIONS IMPROVE'

Medical-and-industrial conglomerate Danaher Corp (DHR.N), a serial acquirer, expects to spend about $5 billion on deals over the next couple of years. Its CFO says cheaper deals are the flip side of weaker markets, since corporate boards may prefer to sell than to work their way through another downturn.

"You haven't seen a ton of industrial M&A in the last 12 months. We are encouraged, I think, by the last six or eight weeks in the marketplace," Danaher CFO Dan Comas said.

 "Generally, on the industrial side, we've seen valuations improve a fair amount versus a year ago," Comas said. "A year ago we thought they were particularly expensive where I think people had a view that we're in for a 10-year recovery, and that has gotten calibrated a little bit differently today."

The executives did not name targets since disclosure could drive up prices or attract competitors'' attention.

For example, Acuity has lost almost a quarter of its value since mid-March amid evidence a recovery in U.S. construction has yet to gain momentum.

Sellers, for their part, have more realistic price and growth expectations, said David Meline, 3M Co's (MMM.N) CFO.

"I feel optimistic about our ability to do additional (deals) this year, more likely to be in the bolt-on type profile than something more transformational," Meline said.

In recent weeks, 3M paid $110 million for the electronic tolling business of Federal Signal Corp (FSS.N), and bought CodeRyte Inc., a provider of language processing technology for healthcare providers for an unspecified sum.

The expected acceleration follows a quiet stretch. Announced acquisitions of industrial targets totaled $96 billion so far this year, down 22 percent from 2011, Thomson Reuters data show. Eaton's $12 billion takeover of Cooper is the year's biggest industrial deal, and the seventh biggest overall.

DWINDLING CASH PILES

A steep downturn in Europe could yet spoil industrials' appetite for all but the smallest deals, especially if it affects the U.S. economy.

"Nobody gets to be healthy by themselves for very long," said Jeff Dobbs, who heads KPMG's diversified industrials practice. "If they get pneumonia, we'll get a pretty bad cold."

Still, bankers and executives say they expect Europe to sort out its problems. Meanwhile, evidence suggests manufacturers are swimming against the tide, spending cash while companies in other sectors are adding to their cash piles.

For instance, interest in nearshoring has picked up since the start of the year, said Brendan Tierney, managing director at Janney Montgomery Scott LLC.

Examples of M&A used to boost nearshoring are so far scarce, but companies ranging from Japanese carmakers Nissan and Honda, to GE (GE.N) and Caterpillar (CAT.N), have shifted some manufacturing to U.S. and Mexican plants.

Tierney, who leads Janney's industrial banking group, works with acquisitive companies like Danaher, Parker-Hannifin (PH.N), Eaton and Dover (DOV.N), which typically prefer bolt-on deals in the $50 million to $500 million range.

Reuters' data show acquisitions of Europe-based companies accounted for 40 percent of announced industrial deals in the first half, far more than the United States. Lately, though, U.S. assets are generating the most interest.

"The companies that we're representing that just have exposure in North America, we have been marketing (those) as gems," Tierney said, citing the example of an industrial purification business for oil and gas, and other industries.

"We're getting traction from buyers who two, three years ago were looking for geographically diversified businesses," he said. "Now it's the opposite."

Europe's weakness could be actually a positive for deal making, analyst Sprague said, "because (it) keeps rates low and keeps companies hungry to look for deals to drive growth when it's tough to get organically."

Well-capitalized European conglomerates like Schneider (SCHN.PA) and Siemens (SIEGn.DE) could target U.S. assets to shrink their European exposure, he added.

(Additional reporting by Soyoung Kim in New York and Scott Malone in Boston; Editing by Leslie Gevirtz)