Mergers on rise as companies await a recovery

Latest is $7.6b bid by Caterpillar

By Pallavi Gogoi
Associated Press / November 16, 2010

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NEW YORK — Big deals are a big deal again. Some of the best-known names in corporate America are scooping up smaller companies, putting the piles of cash they have been sitting on to use and positioning themselves for an economic recovery.

The volume of mergers and acquisitions is still well below what it was in 2007, before the Great Recession, but the burst of activity shows that companies are starting to shake off some of their caution.

Yesterday, Caterpillar Inc. said it will buy Bucyrus International Inc. for $7.6 billion. Caterpillar, the world’s largest maker of construction and mining equipment, was sitting on $2.3 billion in cash at the end of the third quarter. The acquisition will allow Caterpillar to add to its line of mining equipment, which is in high demand in emerging markets.

Last week, Chevron Corp. said it would buy the natural gas producer Atlas Energy Inc. for $4.3 billion, giving the oil company an entry into the rich gas fields in the eastern United States.

In the past three months, Unilever PLC bought Alberto-Culver Co. for $3.7 billion, and Southwest Airlines Co. bought AirTran Holdings Inc. for $1.4 billion. Pfizer Inc. bought King Pharmaceuticals Inc. for $3.6 billion, and Google Inc. bought BlindType, a start-up that corrects sloppy typing on mobile phones, for an undisclosed price.

The deals are happening, in part, because companies had amassed a record $1.84 trillion in cash as of June 30, according to the Federal Reserve.

Mergers-and-acquisitions volume reached $2.25 trillion in the first 10 months of the year, a 28 percent increase over last year. August had the most activity on record, with $307 billion in deals, according to Dealogic, which tracks such data. October remained strong with $202 billion deals, up 32 percent from a year earlier.

“It’s an early indicator that confidence is shifting,’’ said George Geis, of the University of California Los Angeles.

Almost all the deals involve companies buying other companies. Private equity firms, which spurred the last decade’s buyout boom, have made just 8 percent of the acquisitions this year, compared with 23 percent in 2006.

But unlike the deal-making of the 1990s and most of the 2000s, ego-driven blockbuster deals are rare now. This year, most deals have been driven by the recession. Companies that want to be prepared for an improving economy pursue acquisitions because they fill holes in their businesses, said Robert Bruner, dean of the Darden School of Business at the University of Virginia.

One positive: Today’s deals are less likely to result in mass layoffs. Newly combined companies will cut redundant jobs. But they will not be at the mass scale previously seen because the recession has already wrung fat from the workforce, Bruner said.