Hungry buyout firms make targets pricey: execs

By Megan Davies

NEW YORK (Reuters) - The deal-hungry private equity sector has driven up prices of potential acquisition targets so much that large takeovers are tough to do, leaders of some of the top U.S. manufacturing companies said this week.

Companies are instead pumping cash into share buybacks or searching for smaller acquisitions that are not so hotly pursued by buyout firms, executives told the Reuters Manufacturing Summit in New York.

"It is a very difficult time to justify large acquisitions," said Timken Co. (TKR.N: Quote, Profile, Research, Stock Buzz) Chief Executive Jim Griffith, who said his targets tend to be less than a couple of hundred million dollars.

"We can find smaller deals that we are capable of doing and translating rapidly to the bottom line," said Griffith, whose company makes bearings and specialty steel. "When we look at valuations on the larger deals, it's just not a good time to be in the marketplace."

Diversified manufacturer Illinois Tool Works Inc. (ITW.N: Quote, Profile, Research, Stock Buzz) is also targeting smaller deals.

"It's as difficult and competitive a time as there's been, particularly on the larger opportunities, given the large presence of many different private equity firms with plenty of capital to employ," said Illinois Tool Chief Executive David Speer.

Private equity firms typically buy companies with a small portion of their own cash and borrow the rest. They usually hold a business for three to five years, restructure it, then sell it to one buyer or set an initial public offering.

In an increasing trend, private equity firms have been banding together to target bigger prey, such as Monday's $31.8 billion bid by a consortium to buy Texas power company TXU Corp. TXU.N.

If the deal closes, it will be the largest leveraged buyout in history.

While bids have crept up over the past few years, it is more expensive to buy large companies than small ones, according to data provider Dealogic.

In the United States, bidders paid an average of 17.4 times a company's earnings for deals of $1 billion or less. That compares with a multiple of 21.2 times for deals greater than $1 billion, according to Dealogic data.

BUYBACKS ATTRACTIVE

Higher prices mean some companies are opting to buy back stock rather than compete with private equity for deals.

Honeywell International Inc. (HON.N: Quote, Profile, Research, Stock Buzz) Chairman and Chief Executive David Cote said "sporty" prices that others have paid for acquisitions has meant the company used a large chunk of cash for buybacks rather than deals last year.

"I was surprised at the prices that some companies were willing to pay" for acquisitions, said Cote.  Continued...