Conglomerate M&A Rumors: Loose Lips Sink Ships (UTX, TYC, HON, TXT, GE, DBD, ITT)

There is value in the world of conglomerates.  The news flow is further evidence of that, but we have to throw up the caveat the driving force today should likely be considered a rumor rather than news until more details emerge.  Reuters has the conglomerate sector up in arms today on its report that United Technologies Corporation (NYSE: UTX) is out putting together a financing that could be more than $20 billion to fund a large acquisition.  It is those ‘people familiar with the matter’ that is the basis for all of today’s excitement.

This of course has speculation that Tyco Corporation (NYSE: TYC) could fall into the prey category, and we would caution that this is not the first time that Tyco has been in the M&A rumor mill. Honeywell International (NYSE: HON) or Textron Inc. (NYSE: TXT) could also be in the target group if you consider their size and markets.  Keep in mind that General Electric Co. (NYSE: GE) once tried to acquire Honeywell but that deal was blocked in the European Union.

Keep in mind that Diebold, Incorporated (NYSE: DBD) was given a $2.6 billion ($3 billion enterprise value) hostile buyout offer from United Tech, but that was withdrawn in late-2008 after Diebold fended the buyout off.  Its shares are now higher than when the buyout offer was first made, but the stock is still well down from its highs. Diebold was also worth more than $50 a share back in 2007.  United Tech also paid $1.8 billion to acquire GE’s security operations in 2009, which closed in 2010.

Another situation that comes to mind is the break-up of ITT Corporation (NYSE: ITT).  The market cap is ‘only’ about $8 billion and the $44.50 price compares to a 52-week trading range of $42.08 to $64.00.

Rockwell Collins Inc. (NYSE: COL) is another name which might fit in and the 6% gain to $55.33 today should actually be noted that the stock was under $48.00 as recently as this last Tuesday.

Again, the implication is that there is value in the conglomerate sector.  Taking out a loan for M&A (or for a huge buyback) is currently cheaper than it has almost ever been.  Imagine a ten-year debt financing for under 3% or 4% in annual borrowing costs for a corporation… Then add in other accretive acquisition opportunities.  The strong companies can prey on the weaker companies right now.

Our value analysis take is that GE still remains the best value in the conglomerate sector, but that is a different matter entirely.

United Technologies is not even down 1% at $74.88 on the news, and its 52-week range is $67.12 to $91.83.  The summer market drop was particularly harsh on this company.  We recently opined that United Tech could be one of the next megacap stocks (over $100 billion in stock value) and that it might it acquire its way there.  Maybe it isn’t too far off base after all.

JON C. OGG