Industrial manufacturing sector produces further growth

30 May 2008 — Deal making in the global industrial manufacturing industry is growing strongly and looks set to remain at high levels in both the near and longer term future. A new report by PricewaterhouseCoopers ‘Producing Value’, finds that both deal numbers and values are increasing. Given that many sectors remain extremely fragmented, there is also excellent potential for securing cost synergies, particularly among small and middle-market targets.

Between 2005 and 2007 there were over 4,100 completed mergers and acquisitions (M&A). Very large deals worth over $1 billion represent more than half the sum that was traded in the industrial manufacturing sector during this time period. There were 39 such transactions, with a collective value of $106.1 billion. But many of the smaller players are also consolidating. Over 1,400 deals had values of less than US$100 million and nearly 2,500 had undisclosed values, most of which would have been quite small scale transactions.

The rate of M&A activity is also increasing, with well over 1,500 transactions in 2007, up from just under 1,200 in 2005. The aggregate worth of the deals whose values were disclosed has risen even more sharply year on year. In 2007, a record $97 billion changed hands, more than double the $45.7 billion that was traded in 2005. A surge in the number of transactions worth $5 billion or more accounted for much of this dramatic increase, and brought the total for all three years to a hefty $198.8 billion.

Western Europe accounted for nearly 40% of the deals. Germany took pole position, with 385 deals collectively worth more than those that occurred in France and the UK combined. But three very large US transactions saw North America shoot to the top in terms of the total value that was traded.

Many of the sectors experiencing strong deal activity support ‘hot’ industries like electricity, gas, oil exploration, mining and construction. There is also robust activity in heating, ventilation and air conditioning and industrial automation.

Graeme Billings, global industrial manufacturing leader, PricewaterhouseCoopers, commented:

“Financial buyers were involved in fewer deals in the first quarter of 2008 but there is still considerable private equity fund potential. Manufacturing companies are less exposed to falling consumer confidence than companies in many other sectors so the share of available cash is likely to increase.”

Many industrial manufacturing companies are highly diversified. Savvy management teams are taking a close look at the underlying logic of their business mix and using deals to obtain strategic advantages. In some cases this means stripping out subsidiaries, or even entire divisions, where the business case no longer supports the company’s overall goals. In other cases it means purchasing a company that can help deliver access to a new market niche, region or technology, or turn a small player in a segment into a global leader. Some companies are taking both routes.

Bolting on a subsidiary with a strong presence in a new market or first rate research and development capabilities in emerging technologies is proving a popular strategy. Most deals are driven by a number of motivations but nearly all also aim to achieve cost synergies. Such savings typically come from streamlining a new subsidiary’s sales processes or integrating its administrative processes into an existing shared services centre, rationalising the supplier base and securing economies of scale in procurement, manufacturing and distribution.

Graeme Billings, global industrial manufacturing leader, PricewaterhouseCoopers, commented:

“The industrial manufacturing sector is vast. It comprises some of the world’s biggest and best known corporations, as well as a substantial number of small and middle-market players. It is this diversity that makes its M&A activity so far reaching.”

The report anticipates there will be more deals in emerging markets like Eastern Europe, India and China. This will include both deals involving Western players keen to expand their footprint and capitalise on the opportunities for low-cost manufacturing as well as deals involving companies from emerging countries as they become global players. Companies in emerging regions are seeking access to cutting edge technology, skilled engineers and expertise in research and development.

New regulations and legislation on energy efficiency, such as tougher requirements in areas like heating and ventilation, could prove an impetus for additional deal making in a number of sectors. Improving technology and enhancing energy efficiency in the mill or factory can help reduce the carbon footprint of many manufacturing sectors, so makers of machinery and equipment and power distribution systems stand to benefit from the impact of increasing regulation of carbon emissions.

However, average deal values are likely to decrease. The current economic situation makes extremely large deals riskier. At the same time, many small and mid-sized industrial manufacturing companies are performing well and it looks like there will be further consolidation in the $200–$500 million range.

Notes to Editor

1. ‘Assembling value’ focuses on companies producing machinery and equipment, as well as makers of electrical equipment, fabricated metal products and electronics (excluding those for consumer use and computers and peripherals).
2. Visit our site to download a copy of ‘Producing Value: global industrial manufacturing mergers and acquisitions review and analysis 2005–2007’.

'PricewaterhouseCoopers' refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.