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Companies crank up the deals, put cash to work

From Caterpillar to Chevron to Google, some of the best-known names in corporate America are scooping up smaller companies, putting the piles of cash to position themselves for a stronger recovery.
Caterpillar was sitting on $2.3 billion in cash at the end of the third quarter. So the world's largest maker of construction and mining equipment spent $7.6 billion to buy Bucyrus International.
Caterpillar was sitting on $2.3 billion in cash at the end of the third quarter. So the world's largest maker of construction and mining equipment spent $7.6 billion to buy Bucyrus International.Anonymous / AP
/ Source: The Associated Press

Big deals are a big deal again.

From Caterpillar to Chevron to Google, some of the best-known names in corporate America are scooping up smaller companies, finally putting the piles of cash they've been sitting on to use and positioning themselves for a stronger economic recovery.

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

"Our pipeline is bursting," says Robert Profusek, head of mergers and acquisitions at the law firm Jones Day, who advised Continental Airlines when it was acquired by the parent of United for $3.2 billion. "We are gearing up for an incredible M&A boom."

M&A volume reached $2.25 trillion in the first 10 months of the year, a 28 percent increase over last year. August was the highest month on record, with $307 billion in deals, more than double August 2009, according to Dealogic, which tracks such data. October remained strong with $202 billion deals, up 32 percent from last year.

"It's an early indicator that confidence is shifting," says George Geis, faculty director of the mergers and acquisitions executive program at the University of California, Los Angeles.

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

Typical is Caterpillar Inc.'s announcement Monday that 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 allows Caterpillar to add to its line of mining equipment, which is in high demand in emerging markets.

Just last week Chevron Corp. said it would buy natural gas producer Atlas Energy Inc. for $4.3 billion, giving the oil company an entry into the rich gas fields in the eastern part of the U.S.

Among the other deals in the past three months, Dove soap maker Unilever PLC bought the VO5 haircare company Alberto-Culver Co. for $3.7 billion, and Southwest Airlines Co. bought AirTran Holdings Inc. for $1.4 billion. Drug giant Pfizer Inc. bought pain medication maker King Pharmaceuticals Inc. for $3.6 billion, and Google Inc. bought BlindType, a startup that corrects sloppy typing on mobile phones for an undisclosed price.

The deals are happening, in part, because companies have amassed a record $1.84 trillion in cash as of June 30, according to the Federal Reserve. That was 18 percent more than a year earlier.

Few things in business conjure up as much excitement as wheeling and dealing. Mergers are a high-stakes, secretive game and often reflect an ambitious executive's eagerness to leave a personal stamp on the company. Some of that atmosphere is back. The recent Southwest Airlines-AirTran deal used secret codes such as "falcon" and "cowboy" in e-mails and documents exchanged between executives to keep their talks confidential.

But unlike the dealmaking of the 1990s and most of the 2000s, ego-driven blockbuster deals are rare. Most deals this year have been smaller and driven by strategic decisions emerging from the recession.

Every recession brings change. Products, and sometimes companies, become obsolete. Consumers' tastes change. Hard times drive innovation, which leads to new technologies and products. Companies that want to be prepared for an improving economy pursue acquisitions because they are a quick way to fill holes in their businesses, says Robert Bruner, an M&A expert and dean of the Darden School of Business at the University of Virginia.

One positive: The deals are less likely to result in the mass layoffs that often come with mergers and acquisitions. Hewlett-Packard Co.'s $25 billion deal for Compaq in 2001 resulted in at least 15,000 layoffs, and Bank of America Corp.'s acquisition of Merrill Lynch at the height of the financial crisis resulted in 35,000 job cuts.

There's no doubt that newly combined companies will cut redundant jobs. But they will not be at the mass scale previously seen because the deep recession wrung out the fat from the work force, Bruner says.

Chris Young, head of takeover defense at Credit Suisse Group's mergers & acquisitions unit, says more companies are willing to consider deals than just a few months ago.

"When the prevailing view is that the world is going to end, a director would be more concerned about making sure to hoard cash and get the house in order rather than making acquisitions," Young says. Now, clients have stopped talking of a double-drip recession and started discussing "ways to restart the engine of growth."

Technology giant IBM Corp. has made 15 acquisitions this year, up from eight in 2009. Each is in an area that has the potential for high growth.

"We choose companies that will help us fill a missing piece in our portfolio or expand what we already have," says Steve Mills, a senior vice president at IBM and the architect of its acquisitions.

3M Co., which makes Post-It notes and Scotch tape, is on a buying spree. CEO George Buckley said he would spend $2 billion on acquisitions in 2010, double the amount last year. The acquisitions range from Ross Reels, a manufacturer of fly fishing reels, to Arizant, a maker of specialty medical products.

Google has made 20 acquisitions so far this year, compared with eight the previous two years combined. Most acquisitions are in rapidly growing areas like smart phones and social networking.

Executives from disparate businesses are pumping up an atmosphere of anticipation too. Executives at BMW AG and U.S. Bancorp say they are looking for opportunities.

"This is the time to buy and position yourself for the takeoff, even if there is the risk of a double-dip (in the economy)," says Thomas Lys, who teaches mergers and acquisition at the Kellogg School of Management at Northwestern University. "No guts, no glory."