Industrial manufacturing M&A value skyrockets past historic levels

Following a historic second quarter, merger and acquisition (M&A) activity in the industrial manufacturing sector maintained a strong momentum in the third quarter of 2014.

These are among the results of Assembling Value, a quarterly analysis of global deal activity in the industrial manufacturing industry by PwC US. With $102.7 billion in deal proceeds recorded so far this year, the first nine months of 2014 have already exceeded all annual totals of the last 10 years.

In the third quarter of 2014, there were 55 industrial manufacturing transactions worth $50 million or more, for a total deal value of $27 billion. On a year-over-year basis, the first nine months of 2014 surged 165% to $102.7 billion, from $38.7 billion in 2013. This increase in value is mainly driven by five mega deals (transactions worth more than $1 billion) which accounted for 75% of total deal value to date. In addition, divestures made up 38% of total year-to-date deal volume and 51% of deal value.

“After a blow-out second quarter, large manufacturers continued to reevaluate their portfolios, leading to divestures of non-core assets,” said Bobby Bono, U.S. industrial manufacturing leader for PwC. “Companies traditionally strengthen what assets they have, but they’re now looking at what is strategic, what is not, and what non-core assets they can shed. It’s not so much consolidation as an emphasis on vertical orientation.”

Among the industrial manufacturing sub-sectors, industrial machinery remained the clear leader, representing 47% of total deal activity in the third quarter, followed by fabricated metals products (22%). In particular, deals in the oil, gas and petrochemical related industries remained of interest, accounting for a 27% of total deal volume year-to-date and as much as 40% of U.S.-related transactions as companies looked to capitalize on the U.S. shale-gas boom. Smaller deals also occurred in the valve, pumps and compression businesses as drillers push for newer technology and broader capabilities to achieve greater yields on their shale and related investments.

Regionally, targets in North America remained attractive, accounting for 70% of total deal value during the quarter and 36% of deal volume. Bono said all regions reflect the preference toward local activity, which represented 71% of all deals. “Where do we make and where do we sell? They hope to align those, and companies that make and sell in the same area have a natural hedge against currency fluctuations,” Bono said. “That’s in addition to lower transportation costs, better service, more agility and less inventory.”

PwC analysts are monitoring several other trends that are expected to affect the values and locations of deals in the industrial manufacturing sector, including:
● Tightening the core – Divestiture of noncore businesses is recurring across the industrial products sector. Spin-offs, carve-outs, and other related arrangements can free up capital and favorably affect both financials and operations.
● Revising the portfolio – Mixed global economic results and an uncertain outlook are expected to continue to drive portfolio reshuffling, merging of horizontal and complementary businesses, and divestiture activity.
● Counting on quality – Strategic buyers continue to lead transactions, but financial buyers have gained exposure to a variety of manufacturing end markets, with the common theme being a desire to gain high-quality engineering and production differentiation. Private equity managers have been paying higher multiples in industries with stable growth profiles and room for operation improvement. During 3Q14, investors targeted a wide range of industries including printing parts and machinery, ship engines, power plant generating sets, and agricultural machinery.
● Keeping busy in China – Inbound acquisition activities remain muted in China due to concerns about economic growth. However, Chinese companies weren’t deterred from acquiring domestic firms. In fact, more China-involved deals have occurred in 2014 than in any of the last 10 years.