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Chiefs who bucked early spending have upper hand

All those corporate executives who were apologizing a few months back for having built up their cash reserves suddenly are the best positioned to survive the current credit crunch and to take advantage of potentially falling prices for deals.

It used to be that private-equity investors were using piles of debt to acquire companies, and executives who borrowed to expand businesses or repurchase their company shares were lauded for their business acumen. Now, those who were much more cautious about spending and borrowing are the ones who look savvy, as debt markets roil, large deals collapse or are renegotiated at lower prices, and fears of a recession mount.

Martin Ellis, executive vice president and CFO of Agilysys in Boca Raton, Fla., once had to defend himself to bankers and business associates for wanting a balance sheet that wasn't debt laden. "There were people who said cash no longer mattered," he recalled.

He managed to persuade his bosses to adopt his strategy: raising cash by selling off roughly half of the company, including Agilysys' traditional electronic-components business.

It worked. With the sale, he paid off all of the company's debt and still had money left over to expand its computer systems and software businesses.

"We've been debt-free for three years, for the first time in 30 years," he said.

Flush with cash, the company also can turn its focus to acquisitions, where Ellis now finds he has the upper hand in negotiations with sellers. Agilysys recently bought a small software company from a private-equity firm.

"We won because we could get the deal done quicker than other potential buyers who needed financing," said Ellis. "And when the private-equity folks were suddenly on the selling rather than the buying side, we saw they were very eager to get cash."

Scores of companies are in this position, especially in the industrial and technology sectors, said Michael Mankins, a partner at Bain, the New York consultant. "Suddenly the playing field is a lot more even," he said. "Private-equity firms are focused on getting done the deals they've already negotiated, or even seeing some collapse, giving corporate executives room to compete better."

But these executives have to let go of their strategies of caution. They must move quickly if they want their reserves to translate into opportunities for expansion and moves into new markets. That isn't easy amid fears of a slowdown. Some executives continue to wonder whether they should wait for prices to drop further when faced with an acquisition prospect.

Bruce Nolop, CFO of Pitney Bowes (NYSE: PBI), thinks trying to time acquisitions is as complicated as trying to time the stock market -- and can lead to bad choices.

"We'd much rather pay a fair price for something that makes sense than a bargain price for a bad acquisition or anything we don't need," he added.

In the past six years, Pitney Bowes, the Stamford, Conn., mail-management-equipment company, has spent some $2.5 billion to acquire about 70 small businesses. Executives there set a maximum price they will pay before they begin negotiations. Among its acquisitions: MapInfo, a software business that provides location-technology information used by MapQuest and others, for $408 million. Pitney Bowes's chief rival in the bidding was a private-equity firm. If the negotiation was taking place today, "we might not have had to pay as much for it," said Nolop.

On the other hand, MapInfo put itself up for sale only after if had been approached by the private-equity firm -- "so competition from this arena cuts both ways," he noted, both heightening competition and providing opportunities.

Fred Kindle, CEO of Asea Brown Boveri, the Zurich maker of electrical power and automation products, is still hunting for deals. ABB currently has $3 billion in cash on its balance sheet -- a sizable amount that Kindle knows he must use soon for expansion efforts at ABB.

"We have to do something with the cash by 2008," Kindle acknowledged.

He and other top ABB executives have been acquisition shopping for some 18 months now, but so far haven't found anything they want for a price they're willing to pay. Their caution is understandable given the company's woes just four years ago, when Kindle took charge. Then, ABB had a lot of debt and faced paying billions of dollars in asbestos-related claims.

Those claims are now settled and ABB has had strong double-digit profit and revenue growth -- thanks to steep demand for its electrical power and automation products, and Kindle's prodding of staff to operate and serve customers more efficiently.

"I'm an entrepreneur, not a fund manager," said Kindle, adding that he and top executives would rather make an acquisition than repurchase shares. "But if an acquisition doesn't work out right away, we can our cash to grow organically -- and having cash certainly gives us flexibility."

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