ABB, the Swiss-Swedish electrical engineering group, on Wednesday set itself a two-year deadline for big acquisitions, failing which it would return cash to shareholders.
Unveiling ambitious new plans for virtually doubled sales growth and much higher margins, Fred Kindle, chief executive, said management understood it could not accrue cash for ever.
“Two years down the road is definitely too late. If we cannot meaningfully use the cash, we must return it to shareholders”, he said.
The new financial goals sealed a remarkable turnround for a company that nearly collapsed five years ago and has since pursued a textbook recovery through asset sales and a focus on its booming power and automation markets.
Sharply rising earnings and sale proceeds have swollen the group’s warchest to about $3.4bn after its latest divestments. Combined with higher gearing and new shares, analysts estimate ABB could have up to $15bn in financial firepower.
“Is ABB going to make a large acquisition or several medium or small ones? I would certainly hope so. In terms of financial affordability, everything is possible”, said Mr Kindle
More than 100 large targets had been screened and “dozens” of potentially attractive businesses identified, but acquisitions had been thwarted by unacceptably high prices, he revealed.
Mr Kindle surmised turmoil in financial markets and rising interest rates might strengthen the hand of trade buyers, compared with financial sponsors. “Recent market jitters may increase the likelihood we will make a purchase, but that isn’t certain”, he said.
ABB’s priority remained investment in organic growth. But the company had identified automation products, power products and process automation as offering the best takeover chances. “We know what we would like to have”, he said.
Investors welcomed the new financial targets, reflecting vibrant demand. However, some analysts expressed disappointment about the lack of concrete information on buybacks or dividend rises, and the shares fell nearly 4 per cent to SFr28.70.
Under its new financial targets for 2007-11, ABB’s goal for sales growth, before acquisitions, has risen to a compound 8-11 per cent a year, compared with “more than 5 per cent”. The target for operating margins has climbed to 11-16 per cent, compared with “more than 10 per cent.”
The former targets, set in 2005 for attainment by 2009, had been met or exceeded thanks to buoyant demand and higher productivity.
In power products, ABB’s biggest single business, Mr Kindle forecast sales would rise by 10 per cent a year - almost double the market rate – while the operating margin would reach 17 per cent from almost 13 per cent today based on current favourable trends.
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