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M&A

Spurred by cheap financing, companies eye takeovers Add to ...

The hunt is on.

Loaded with cash and alert to opportunities, companies are starting to stalk takeover targets, further proof that they've emerged from the recession in surprisingly good shape.

On Monday, Hewlett-Packard Co. became the latest company to join a flurry of deal-making activity over the past week. It offered to buy 3Par Inc., a data storage firm, for $1.6-billion (U.S.), topping an earlier bid by rival Dell Inc. for the company.

Such bids represent a delicate balancing act. Executives remain profoundly uneasy about the health of the U.S. economy and its future growth prospects. But companies have huge piles of cash to spend, not to mention the ability to borrow at the lowest rates they've ever seen. Missing the chance to put those resources to work and snap up desirable businesses could prove a major blunder.

In recent days, several companies have sought to seize the moment, turning the normally sleepy final weeks of summer into a hive of activity. BHP Billiton launched a massive hostile bid for Potash Corp. of Saskatchewan Inc., while Intel Corp. announced it would acquire software firm McAfee Inc. in an all-cash tender.

"I usually work on my golf game in August," says Robert Profusek, head of global mergers and acquisitions at law firm Jones Day. Not this year. As companies put their cash to work and access cheap financing, a flurry of deals which were under deliberation for months are coming to fruition.

"The debt markets are phenomenal right now," says Mr. Profusek. "There's money available to do anything."

The deals highlight how well the corporate sector managed to weather the recession, in sharp contrast to households and governments. Companies slashed costs and shed workers, then saw a surge in profits as the economy came out of its tailspin. At the end of the first quarter, U.S. non-financial companies had nearly $2-trillion in cash on their balance sheets, a record.

Meanwhile, debt levels aren't "enormous or unmanageable," says Howard Silverblatt, a senior analyst at Standard & Poor's who tracks the firm's trademark stock index. Companies "definitely have the resources" to execute deals, he says, but predicts that a substantial revival in activity won't come until they're starting to feel a bit more confident.

While a broad swath of U.S. companies is socking away cash, some industries have taken the trend to extremes. It's no accident that a number of recent deals are in the technology sector, where balance sheets are especially flush. Take Intel: in late June it held $17.7-billion in cash and other liquid assets, up from $11.3-billion a year earlier. Its long-term debt was just $2-billion.

Even after the firm acquires McAfee, analysts at investment firm Caris & Co. estimate that Intel will still have roughly $15-billion in cash on hand at the end of this year. That gives it room to acquire other companies, buy a chunk of its own shares, or increase its dividend.

A number of large U.S. firms have stated publicly that they're on the lookout for acquisitions either at home or abroad, including International Business Machines Corp., 3M Co., and Caterpillar.

"We have cash. We have a strong balance sheet. We can do some things at this stage that in past recessions, we couldn't do," said Doug Oberhelman, Caterpillar's CEO, last week in a meeting with analysts at the New York Stock Exchange. "We intend to use the strength of our balance sheet in a big way to take advantage of that while we can at this early stage of recovery from the recession, while valuations and prices are right."

Such openness to acquisitions doesn't mean that CEOs are throwing caution to the winds. One consequence of the financial crisis is that the gestation period for deals has lengthened as firms make doubly sure that they grasp all the possible ramifications of a transaction, from the legal risks to tax implications.

Companies are "drilling down deeper and much more carefully to make sure you're not making a mistake," says Mr. Profusek of Jones Day. "It's still a risk-averse environment."

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