Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

`Tis the season for taking stock and looking ahead to what the new year will bring. And so this week, some of America's biggest industrial companies -- GE, Honeywell and 3M included -- delivered their 2016 outlooks, following peers that had presented earlier in the month.

The message they delivered, pretty much across the board, is to expect slow growth, slow growth and more slow growth.

Plodding Along
Revenue at big U.S. industrials isn't expected to grow much more than the economy itself.
Source: Bloomberg, company filings
Data for companies reflects the mid-point of ranges given in 2016 outlooks for organic or core revenue growth. 3M data is for organic, local-currency growth.

The takeaway for investors: Expect another big year of M&A and shareholder activism. Cost cuts and acquisitions are vital to counter sluggish sales and keep earnings growth pumping. That's a bugle call to investment bankers and the likes of activist investors such as Nelson Peltz.

Building Blocks
Industrial M&A by U.S. acquirers is at a record.
Source: Bloomberg

Already this year, U.S. makers of everything from airplane parts to Post-It notes have announced $173 billion in takeovers so far in 2015 -- a record based on data compiled by Bloomberg.

But compare that total to the pharmaceutical industry, where Pfizer is spending almost that much on just a single takeover -- the $160 billion purchase of Allergan -- or the oil and gas sector where Royal Dutch Shell is paying roughly $80 billion to buy BG Group. Industrials are one group where the M&A record may be broken yet again.

Industrial companies aren't alone in the slowing-grow camp; that's what drove AB InBev to its record takeover of SABMiller and Dell to buy EMC in the biggest technology deal ever. But with a global economy that's expanding at a baby-step pace, slumping prices in virtually every commodity and some unfavorable currency fluctuations, multi-national industrial companies are feeling the pain more than some other categories.

We're probably not going to see a $100 billion or even a $50 billion industrial mega-merger. The closest we might come is a $40 billion-ish train combination if Canadian Pacific (or another buyer) can convince Norfolk Southern to strike a deal. Most industrial companies are talking about "bolt-on" acquisitions, but "bolt on" can be pretty big when your market value is in the range of $100 billion or more as is the case with GE and Honeywell.  

GE is reportedly already in advanced talks to buy the drill-bits and drilling-services businesses of Halliburton, which could be valued at as much as $5 billion. Honeywell says it could match the $5.5 billion it put toward acquisitions this year in 2016.

Those two, along with Danaher and Roper, are in a position to use deals to supplement earnings. That group is also considered some of the best operators in the industrial business. So it's no coincidence that their stocks have outperformed most other big diversified industrials this year.  

Other companies aren't looking as good. Pentair wants to do more acquisitions, but it's financially limited after a string of acquisitions this year including the $1.8 billion takeover of Erico Global announced in August. The Erico deal was struck just shortly after Nelson Peltz's Trian Fund Management got involved with the stock and started pushing Pentair to strike more deals. Trian's co-founder Ed Garden, who will join Pentair's, also wants margin enhancement.

Activist investors could start sniffing around other industrials. SPX Corp., Joy Global, Cummins and Caterpillar are among those that have underperformed as they consider potential targets, according to Bloomberg Intelligence.  Emerson could also draw interest. The company has good margins, but it hasn't been growing for years. It's just finally exiting some of its worst-performing businesses such as network power, but is it going to be enough? Perhaps there's more value an activist could eke out by pushing the company to actually make the acquisitions it keeps talking about.

Then there's 3M. The stock suffered its worst decline in more than four years after the company cut its 2015 profit forecast for the second time in as many months and failed to give investors much to be excited about in 2016. 3M says it will add $2 billion to $4 billion of debt to help fund buybacks and M&A. The company could take on as much as $15 billion in debt, though, to get its capital structure more in line with peers and has signaled a willingness to drop to a lower credit rating, says Bloomberg Intelligence's Joel Levington.

Getting more aggressive with M&A could help 3M kill the two birds of lower capital costs and slower growth with one stone. It may also revive its sagging stock price. The shares are down a little over 10 percent this year, a bigger slump than the broader Standard & Poor's 500 Industrials Index.

Acquisitions could bring a happier new year.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Pentair isn't technically a U.S. company anymore. It was one of the early movers in the inversion phenomenon, using a combination with Tyco International's flow-control business in 2012 to shift its incorporation from Minneapolis to Switzerland and then to Ireland. But it gets roughly 50 percent of sales from North America and its main U.S. office is still in Minneapolis, so we're counting it as an American company for the purposes of this story. 

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Brooke Sutherland in New York at

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Beth Williams at