We Should Be Deal Shy
- Eaton Corp’s plan to buy Cooper Industries (announced this month), reminds us that the Industrials and Basics group has flexible balance sheets and is generating plenty of free cash. Outside Metals and Mining, companies in these sectors rarely generate shareholder value through acquiring that is close to the premium obtained by the sellers. However, analyzing over 175 deals across the sectors over the last 25 years, 12 month forward returns (relative to the sector) from the acquirer post announcement are positive – averaging 6%, with a median of 1.2%.
- More risk for acquirers occurs post close than post announcement, with average returns relative to sector 200 basis points lower than post announcement. The sectors where you are most likely to get negative returns post both announcement and completion are Capital Goods, Conglomerates and E&C – with E&C showing a terrible record.
- Acquisition in the period from 2000 – 2010 provided more relative upside for acquirers than prior to 2000 or recently. Metals and Mining is an overall positive outlier because most deals took place between 2000 and 2008.
- In an environment where high cash flows and more limited international growth are expected to drive greater deal flow, in search of growth, we would stay away from the more obvious acquirers. By contrast, building a portfolio of potential targets would seem appropriate. We provide screens based on free cash flow and valuation.