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Caterpillar CEO Steps Up Deal-Making to Target Emerging Markets

Caterpillar Inc. Chief Executive Officer Doug Oberhelman is less than five months into the job and already outpacing his predecessor in acquisitions as he seeks to boost sales to emerging markets.

Caterpillar’s $7.6 billion purchase of U.S. mining- equipment maker Bucyrus International Inc. announced yesterday means Oberhelman, 57, has forged $9.4 billion in deals since taking over July 1. Predecessor Jim Owens made $1.9 billion in transactions during his more than six years in charge.

Oberhelman “sees the emerging markets growing at such a good clip that now it becomes, ‘Do we build this technology internally or do we go ahead and buy?’” said Mark Demos, a fund manager for Fifth Third Asset Management in Minneapolis, which owns Caterpillar shares. “These markets are becoming so big, they’d rather take a stab at buying.”

Caterpillar is acquiring Bucyrus, which supplied shovels for the construction of the Panama Canal between 1904 and 1914, to expand the range of mining equipment it offers customers and to tap into booming demand for commodities. Copper, gold and tin have traded at records in London in the past month as mining companies struggle to meet demand.

Shares of Caterpillar fell $1.45, or 1.8 percent, to $80.37 at 4:15 p.m. in New York Stock Exchange composite trading. They have advanced 41 percent this year, leading the Dow Jones Industrial Average. The company offered $92 a share in cash for Bucyrus, funded with a combination of cash, debt and equity. Bucyrus dropped 56 cents to $89.24 in Nasdaq Stock Market trading.

‘Faster-Acting’

Last month, Caterpillar agreed to purchase Mannheim, Germany-based engine-maker Motoren-Werke Mannheim Holding GmbH for about $810 million and in August closed the acquisition of locomotive maker Electro-Motive Diesel of LaGrange, Illinois, for $928 million.

Caterpillar is changing to become a “faster-acting” company, Oberhelman told analysts and investors on a conference call yesterday. Oberhelman said he first talked to Tim Sullivan, CEO of South Milwaukee, Wisconsin-based Bucyrus, about the deal just 60 days previously.

“Oberhelman is much, much more aggressive,” Eli Lustgarten, an analyst for Longbow Research in Independence, Ohio, said in an interview. “It’s really hard to go back and find a time when Caterpillar has participated in so many transactions significantly important to the repositioning of the company.”

‘Wide Open’

Oberhelman joined Caterpillar in 1975, the year he graduated with a finance degree from Millikin University in Decatur, Illinois, which is 80 miles (129 kilometers) southeast of Peoria. He worked in a financial capacity for the company in South America and also served as managing director and vice general manager for strategic planning in Japan.

He rose to become chief financial officer in 1995. Three years later, he became vice president of the company’s engine unit and then group president in December 2001. The unit’s operating profit as a percentage of sales rose to 12.9 percent in 2009 from 5.1 percent in 2001, according to Bloomberg data.

Oberhelman said when he and Sullivan started out in their careers, most of the world was closed to business, citing countries including China and Russia.

“In 2010, the world is wide open,” he said on the call. “The developing market is growing twice as fast as the developed world.”

Growth plans at BHP Billiton Ltd., the world’s largest mining company, and its rivals may help to boost industry spending worldwide next year to a record $113 billion, Paul Galloway and James Luke, London-based analysts at Sanford C. Bernstein & Co., said in a report in August.

‘Bullish Statement’

Bucyrus, which was founded in 1880, undertook a $349 million leveraged buyout in 1994 backed by Goldman Sachs Group. Bucyrus filed for bankruptcy in February 1994 and emerged 10 months later after being allowed to give creditors equity in return for forgiving $135 million of debt, according to Reference for Business.

Caterpillar is paying 16.8 times Bucyrus’s earnings before interest and tax, compared with the 15.1 industry median, according to data compiled by Bloomberg from deals in the past 10 years. Caterpillar is paying 32 percent more than Bucyrus’s closing share price on Nov. 12, compared with the average industry premium of 24 percent in the past 12 months.

Largest Deal

Bucyrus would be Caterpillar’s biggest acquisition, followed by the company’s purchase of Perkins Ltd. in 1997 for $1.3 billion. Caterpillar made $3.34 billion in deals between 1980 and June 30, when Owens stepped down as CEO.

The deal would also be the largest announced in the construction and mining machinery industry in the past five years, according to data compiled by Bloomberg. The 32 percent premium being paid by Caterpillar compares with the 28 percent average paid in the industry in that period.

The Bucyrus deal “is more of a long-term bullish statement about the mining industry, which happens to be largely outside the U.S., as opposed to wanting geographic diversity,” said Joel Levington, managing director of corporate credit in New York at Brookfield Investment Management Inc.

To contact the reporter on this story: Shruti Date Singh at ssingh28@bloomberg.net.

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net.

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