Illinois Tool Works Investment Report

This report reflects the research and analysis I've performed on this company. It is provided for informational purposes only and does not constitute personalized financial advice nor an endorsement or solicitation to purchase stock in this or any other company. Please do your own due diligence or hire a financial advisor before making any investment decisions.

2007, June 15: Decentralized industrial conglomerate on a buying spree.

An analyst put out a note this past week talking about ITW being a private equity target. On a superficial level, this would make sense as Illinois Tool Works provides a nice steady cash flow, the business is pretty solid and the stock's not expensive. But if one pokes deeper, ITW would be a difficult private-equity buyout.

The private equity gameplan normally goes like this: find a company with a solid balance sheet that throws off tons of cash, buy the company, pocket the cash, leverage up the company with debt, sell off some of the assets, streamline the business and finally, flip it onto the equity markets or some other buyer. Does this sound easy? Heck no! And it'd be alot harder with ITW.

ITW is a decentralized collection of over 750 businesses, each largely self-operating. The majority of these businesses are pretty small. Please see the report if you want more specifics, but in a nutshell, the decentralized business model and their philosophy of buying mostly small businesses would make it hard for private equity on a couple of fronts. First, it would be very difficult to streamline segments. If a segment is a collection of, say 50 businesses (ITW doesn't break out their segments in much detail), then a new owner trying to streamline operations has to get buy-in at 50 different businesses. If they wanted to sell that segment, the prospective buyer would face the same issue. Trying to dismantle ITW would be an intensive undertaking as I'm not sure that the current CEO is aware of all of the individual businesses comprising the enterprise. The Wilsonart or Signode operations may be attractive to prospective buyers but what's going to attract the end buyers when private equity wants out?

And finally, the valuation isn't that cheap (that's why we don't own it, duh!). It's not expensive either but any buyer will have to pay a premium and have less room for error.

Nevertheless, the stock jumped 5% or so on the rumor and will probably get taken out at a premium, for all I know. What I do know is that it doesn't make a lot of sense as there's probably lower-hanging fruit left for private equity to pick.

Author Disclosure: Author has no position in this stock.

The Enlightened American

Illinois Tool Works Investment Report