PhillyDeals: Companies growing by buying smaller companies

What's the deal with all the deals this summer?

Intel Corp. is buying McAfee Inc. Hewlett-Packard is buying 3Par. Honeywell Inc. is buying electrical-meter-maker E-Mon, of Langhorne.

U.S. companies are flush with cash, and profits. Yet they are still afraid of the weak economy, so they are not hiring workers or building new facilities. Instead, they are taking advantage of depressed prices and are growing by buying other businesses.

"These larger companies are saying, 'How do we grow in this environment, where the economy is not growing as quickly as we want?' Acquisitions are the way they move the needle," says Patrick Hanraty, managing director at the Center City office of Harris Williams & Co., PNC Bank's investment-banking affiliate, which has advised E-Mon and more than three dozen other U.S. companies in their mergers so far this year.

"Mergers and acquisitions are much more active this year than last," said Andrew Spitzer, who runs Harris Williams' business in energy deals from Richmond, Va. "Buyers were trying to conserve capital last year [and cut spending]," Spitzer said. "They have a lot of excess capital this year."

Mid-market mergers and acquisitions of companies with sales of $10 million to $250 million a year rose to 26 during the second quarter, the most since 2008, GF Data Resources, of West Conshohocken, said last week in its quarterly survey of around 150 U.S. buyout and private-equity firms.

That is up from around 15 deals in the first quarter and from last year, but still down from an average 40 deals a quarter in 2006-07, says GF partner Andrew Greenberg. Prices are still low, compared with the mid-2000s, though fast-growing companies in desirable sectors such as energy are getting higher values.

At privately held factories, since 2007, sales are down, inventories of unsold goods are up, and bills are taking longer to pay - yet profit margins have risen, according to a survey of U.S. accounting firms by North Carolina-based Sageworks Inc., which sells data to lenders.

That means a lot of small businesses look healthier than they really are. "As revenues go down, private companies are cutting payroll," Sageworks chief financial officer Drew White told me. "These companies are lean. They're understaffed. Everyone's working hard. They are tense."

Profits rise as costs are cut, but this can't last forever: "It's a bad spiral. More small companies will go out of business" unless orders start picking up, White concluded.

No wonder more owners are selling.

Wilmington Trust Corp. has hired a blue-chip corporate lawyer from Philadelphia as its first "chief risk officer."

The biggest bank still based in the Philadelphia area, WTC is struggling to dispose of bad loans to Delaware Shore developers, expand its foreign tax-shelter and investment businesses, and convince investors it deserves to remain independent, or at least to command a high price if it is going to get sold.

Carol Baldwin Moody, a graduate of Germantown Friends School, Penn's Wharton School and Columbia Law, worked from the 1980s until 2000 at Citibank's parent companies, where she was the first African American woman in a corporate leadership role. She rose to chief compliance officer as she vetted deals and policies for Citi bosses John Reed and Sandy Weill and eventual boss Charles I. Prince.

She later held the same post at TIAA-CREF, the college investment fund, and most recently at Nationwide Insurance in Columbus, Ohio, regularly flying back to Philadelphia to be with her daughter (a recent GFS grad). The shorter Wilmington-Philly commute, by Amtrak and car, is a welcome benefit of her new job, she told me.

Baldwin Moody reports not just to new Wilmington Trust chief executive officer Donald Foley, but also to Louis Freeh, chairman of the risk-management committee of the Wilmington Trust board. Freeh, former head of the FBI, now runs a Wilmington-based financial and security consulting firm and has been active in Delaware Republican politics.

Baldwin Moody said veteran Philadelphia and Florida banker Robert P. Gehring, the bank's new head of credit-risk management, also reports directly to the board, which is gaining extra eyes under Foley, compared with the more centralized administration of his longtime predecessor, Ted Cecala. He quit as losses climbed earlier this year.

"Certain functions should have independent reporting," says Baldwin Moody.

The U.S. arm of Braskem SA, the Brazilian company that bought Sunoco's polypropylene unit in April for $350 million, is looking for a four-to-five-year headquarters lease in Center City. "With an option to renew," says chief counsel Frederick Fisher.

The group might stay next door to Sunoco offices in the Mellon Bank tower, but that's not final.

Braskem employs around 170 locally, the majority at its Marcus Hook production plant.