- The Washington Times - Monday, March 25, 2002

Most companies have operated like bears in winter during the recent economicdownturn. They've simplified theiractivities, slowed down movements and stopped hunting. Rather than go out and acquire other businesses, they have chosen to sit tight until the situation improves.
But a handful of companies some of them local are bucking the trend and opening their wallets to acquire other firms. Some have survived the downturn and are finding companies to buy at prices unseen during brighter economic times. Others are making strategic purchases in the hope that they will be poised for growth when the economy rebounds. And others are looking to get pieces of industries that have taken off in the past several months because of the events surrounding September 11.
"It's a good time to buy for companies that are well-funded and have the resources," says Brian Greenberg, a senior associate with Kaulkin Ginsburg and Company, a Bethesda firm offering merger and acquisition services for companies. "As long as the companies are well-funded and can pull off the deals, it's fine."
Washington-based manufacturer Danaher Corp. spent nearly $1 billion in the past year buying other companies. Ciena Corp., a Linthicum, Md., provider of laser optic technology, recently spent $1.2 billion to purchase rival ONI Systems Inc., of San Jose, Calif.
Meanwhile, prominent defense contractor Northrop Grumman, based in Los Angeles with a large presence in this region, is working to take over rival TRW Inc. A host of other companies across North America have eschewed conventional logic by pursuing external growth plans in the face of a difficult economic environment.
"The underlying thing is that these are firms that are on an uptick and feel good about their business," says Ben Howe, global head of mergers and acquisitions for SG Cowen.

Still spending
Merger and acquisition activity is at its slowest rate in years, and things aren't expected to pick up for at least several months. The number of North American merger deals decreased about 20 percent between 2000 and 2001, and so far this year deals are down an additional 25 percent, according to data from Bloomberg. In February, there were just 588 deals completed, the fewest monthly total in four years.
"I think right now, we're at the bottom," Mr. Howe says.
But Danaher Corp. is perhaps the best example of a company that has managed to stand out in the last year by pouring heavy funds into its external growth program.
Danaher, best known as the manufacturer of Craftsman tools, has outlined 18 areas of business that it would like to develop or acquire. In the last nine months, the company has purchased seven companies that either establish a new business platform or enhance an existing one. Four of Danaher's largest purchases, valued at more than $875 million combined, were completed since December.
In May, Danaher announced it would acquire Lifschultz Industries, a prominent maker of temperature measurement systems, for $33 million, and followed up that announcement by acquiring the aerospace division of Special Devices Inc. Danaher bought Microtest Inc., a maker of network-testing products, in July and opened this year by closing a $325 million deal to acquire Gilbarco, a maker of retail automation products and a $400 million deal to acquire Videojet, a maker of equipment used for product identification.
Both Gilbarco and Videojet were subsidiaries of London-based Marconi PLC. Danaher also in February closed a $135 million deal to acquire Vividor, a maker of water-testing equipment. The company did not return several phone calls requesting comment on its acquisitions.
Analysts say Danaher is in a position to scoop up other firms because it always seems to have some extra cash lying around.
"They are extremely and intimately focused on generating free cash flow," says Matthew Summerville, an analyst with McDonald Investments in Cleveland. "That is something I would say most companies can't say."
Danaher has been fortunate, because some of the businesses it has acquired recently were firms that parent companies had been eager to sell. Videojet and Gilbarco were easy buys, analysts say, because Marconi had been looking for ways to raise cash.
Despite Danaher's aggressive growth plan, the company has been cautious at times. Last summer, the company tried to acquire Cooper Industries, a Mount Vernon, Ohio-based electrical tools and hardware company, in a deal valued at $6.5 billion to $7 billion. Danaher backed out of the deal last month, however, citing concerns over the slow economy and Cooper's involvement in several asbestos liability cases.
"They won't rush into something, and they can afford to wait until something becomes attractive," says Keiran Hurson, an analyst with Midwest Research, also in Cleveland. "They're not going to do anything risky or do anything stupid."

Forward thinking
On the face of it, one would think Ciena Corp., a maker of optical-networking products, would not be in a position to buy a competitor. The company lost a record $56.7 million during the first quarter of 2002. It announced that sales would be about 50 percent less than expected, as major customers Qwest and Sprint cut orders. The company's revenues of $110 million were about $40 million less than analysts expected, and its stock price has hovered under $10 per share for much of the year.
Still, Ciena announced last month it would acquire ONI Systems Inc., a fellow networking firm based in San Jose, in a deal valued at about $900 million.
"We've made no secret about the fact that we feel the best way to be in the best position when the economy recovers is to continue to invest in the business through a downturn in the market," Ciena spokesman Glenn Jasper says.
Analysts say Ciena's purchase of ONI is a move involving two competitors that is quite common during times when overall merger and acquisition activity is down.
"That is a perfect example of the deals that will continue to happen," Mr. Greenberg says. "It's a perfect time to be a strategic buyer."
Indeed, the company and analysts say the acquisition of ONI is a move designed to place Ciena in prime competitive position once spending on networking picks up. ONI develops and sells optical-networking equipment specifically designed to work in regional and metropolitan areas. It is a business that Ciena, which until now dealt primarily in networking over longer distances, has lacked and longed for.
"These are two companies that are leaders in their respective places in the marketplace," says Joseph Gladue, an analyst with the Chapman Group in Baltimore. "[Ciena] hasn't been as strong in the metro area, where ONI's foothold is. The metro space is where most people believe the next spending boom will come. Most of the long-haul networking has been done."
What's more, Ciena is getting ONI for a cheaper price than it would if the economy were in better shape. ONI has been hurt badly by the decline in technology spending. It said last week that revenues for the first financial quarter of the year would be about half of what analysts had predicted.
While the economy as a whole had shown some signs of rebounding, no one knows for sure when spending on networking equipment will pick up. However, many analysts have said the fourth financial quarter of 2002 could show positive signals. Ciena says it plans to have ONI fully integrated by early 2003, just in time to catch the industry on the rebound.
"You could put off merging the two companies, but it takes time to integrate the product lines, and you can't just put them together haphazardly," Mr. Gladue says.

The war effect
The September 11 attacks and the ensuing war on terrorism have prompted some consolidation in the area of defense contractors and security firms.
Northrop Grumman, a Los Angeles-based defense contractor, announced in February it would try to acquire TRW Inc., a Cleveland-based firm with a prominent auto-parts business, but also heavy involvement in missile defense and related technologies. Northrop Grumman has said it would spin off the auto-parts business if the deal is approved. But TRW has rejected Northrop Grumman's $47 per share offer twice, calling it too low.
Meanwhile, as demand for security services in the United States has increased, related companies have become attractive buys. That was the thinking of executives at Group 4 Falck, the world's largest security firm, based in Denmark. Group 4 Falck announced it would buy Palm Springs, Fla.-based Wackenhut Corp., the largest security firm in the United States for $573 million.

Bouncing back
Danaher, Ciena, Northrop Grumman and Group 4 Falck are the exceptions, not the rule. Merger and acquisition deals are clearly few and far between. But there are signs things will pick up soon. Recent news that the economy has stopped shrinking will help the pace, and company executives have indicated they are hopeful for a turnaround in the near future. What's more, analysts say companies have been busier in the past few months discussing possible deals behind the scenes.
About 60 percent of senior executives from large multinational companies say they anticipate an increase in mergers and acquisitions in the next 12 months, according to a PricewaterhouseCoopers survey released last month. About 90 percent of executives say they expect a pickup in the next two years.


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