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3 Industries and 3 Stocks Riding a 2012 M&A Boom


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1. Engineering and Tyco ABB Ltd.'s (ABB - Get Report) $3.9 billion deal to buy power-distribution equipment specialist Thomas & Betts Corp (TNB) signals that European and U.S. engineering giants may jump back into engineering tie-ups to match growing demand.

ABB's purchase signals that some large international electrical engineering conglomerates -- weighed down by earnings and diversification needs -- may look to cut deals in the U.S. Deals may also be propelled by the fragmented nature of the sector, its low pricing power and a cyclical upturn, according to analysts.

As a result, Morgan Stanley analyst Nigel Coe highlights the remaining pieces of Tyco International (TYC - Get Report) as the most likely takeover target in the space. What was once the $100 billion-plus market cap Tyco International (TYC - Get Report) empire underwent an epic dismantling in two separate 2011 spin deals .

At a far reduced size of $23 billion, Tyco will further shrink in 2012 when the company spins its $3 billion North American ADT residential security business and $4 billion flow control division will create two new publicly traded companies. Those spun pieces of Tyco International, in addition to the company's remaining commercial fire and security division with $10 billion in annual sales and TE Connectivity (TEL - Get Report), a unit spun in 2007, may find takeover interest.

The engineering sector didn't have a big M&A wave even as company valuations were cut during the recession because big players used their capital with discipline, leading to no post-crisis megadeals as of yet. It means that there are plenty of potential growth hungry buyers and attractively priced takeover candidates, according to Credit Suisse analyst Julian Mitchell.

General Electric (GE), Dover Corporation (DOV) and Danaher Corporation (DHR) are potential acquirers in the electrical engineering space according to Mitchell because of their muted deals stance in the second half of 2011. In Feb. 2011, Danaher bought Beckman Coulter for $5.87 billion, but may now be able to absorb a new deal.

Mitchell of Credit Suisse also notes that industrial products conglomerate SPW Corp. (SPX), which recently sold its auto's aftermarket diagnostics division, could enter the fray as a buyer or seller.

ABB's deal to buy Thomas & Betts also signaled that consolidation is "inevitable" in the electrical engineering space as companies try to become more "vertically integrated" while European conglomerates look for U.S. assets to hedge a Eurozone slowdown and falling euro, according to Barclays Capital analyst Scott Davis.

"Although hard to predict, we would expect any transaction to cause further consolidation within the industry. It's logical and timely," wrote Davis in a research note following the deal.

>>To see these stocks in action, visit the 3 Stocks Riding a 2012 M&A Boom portfolio on Stockpickr.

-- Written by Antoine Gara in New York
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