Deal activity in segments of the industrial products industry begins to show an uptick in the second quarter of 2009, finds PricewaterhouseCoopers
Smaller transactions continue to dominate the deal landscape; PwC explores the role of China in the global economy and what it means for the industrial products industry
NEW YORK, August 13, 2009 – The pace of mergers and acquisitions (M&A) continued to decline across the industrial products sectors during the first half of 2009 compared to the first half of 2008, according to a series of quarterly M&A reports released today by PricewaterhouseCoopers LLP (PwC). However, despite the year-over-year decrease, some sectors began showing an increase in volume or value in the second quarter of 2009, when compared to the prior quarter. The chemicals sector experienced an increase in deal volume while the metals sector showed an increase in deal value during the second quarter of 2009. The aerospace and defense (A&D) and engineering and construction sectors were the bright spots in the second quarter, experiencing increases in both deal volume and value from the prior quarter.
When compared to the first half of 2008, deal volume and value in the global transportation and logistics (T&L), industrial manufacturing, engineering and construction, A&D, and chemicals industries slowed significantly in the first half of 2009 as economic uncertainties continued to dominate the global metals economy. However, as deal activity across all sectors remained off from 2008 numbers, the metals sector experienced an interesting twist. While deal volume in the metals sector is on pace to be half of what was announced in 2008, deal value is on target to be 85 percent higher than the total deal value for all of last year.
Strategic buyers continued to act as the main investors in the majority of deals in all segments of the industrial products industry as financial investors remained on the sidelines because of continued tight credit markets and a lack of liquidity. For the most part, deal values and the average deal size decreased from last year’s levels, as the number of large deals declined due to a combination of difficult economic and credit conditions and the need for companies to concentrate on their own operations. Smaller transactions are expected to continue to provide the bulk of deal activity until acquirers gain more certainty over the direction of the economy and the credit markets.
During the first half of 2009, targets located in the Asia & Oceania region accounted for more than one-third of deal volume and value in the metals, industrial manufacturing, A&D, and T&L sectors. As acquirers, the Asia & Oceania region dominated the metals sector, accounting for 94 percent of deal volume and 95 percent of deal value during the first half of the year and accounted for more than one-third of value and volume in the A&D and T&L sectors. While the engineering and construction sector also showed strong activity in Asia and Oceania, 29 percent of the deal value was attributable to U.S. buyers, compared to 21 percent in the first half of 2008.
“The outlook on deal activity and deal value for the rest of 2009 is following along the same path we saw in the first half of the year,” said Dean Simone, U.S. industrial products leader at PricewaterhouseCoopers. “Lack of financial investors, tight capital markets and the practically nonexistent large deal activity suggests we haven’t turned the corner just yet in the industrial products sector. We are seeing some signs of hope in the Asia & Oceania region, but, by and large, we remain off the pace of 2007 and 2008 activity.”
As the deal activity continues to increase in Asia, the second quarter editions of PricewaterhouseCoopers’ M&A reports take a deeper look at China specifically, including the country’s continued impact on the global economy, as well as the challenges and potential opportunities that exist for companies looking to initiate or expand existing business with China.
According to the reports, China’s gross domestic product growth rate is expected to approach or exceed eight percent for 2009. The growth numbers look very enticing for a number of companies and sectors looking to do business in China, but the expectations have changed to some degree as well. The Chinese government is interested in partnerships and strategic alliances and not just simple transactions, changing the way many companies think about doing business in China.
“The role of China in the world economy, and, in particular, the role it will likely play in relationship to these different industrial products sectors, simply cannot be ignored,” added Simone. “While many industrial products companies are already operating in China, those that are viewing China as an integral part of their business model and strategy rather than just a place to leverage labor or other commoditized technology may be more successful. Those companies that are willing to share their technology and intellectual property with China-based businesses have the opportunity to build strong ties to the Chinese market and economy."
Details on each subsector M&A report follow:
Mergers and acquisitions in the global industrial manufacturing industry showed little improvement during second quarter 2009, according to the PricewaterhouseCoopers LLP report, Assembling value: Second-quarter 2009 global industrial manufacturing mergers and acquisitions analysis.
The pace of deal volume (measured by the number of deals with a disclosed value of at least $50 million) slowed substantially on a year-over-year basis, with total deals declining 71 percent to 26 deals in first-half 2009 from 90 during first-half 2008. On a quarterly basis, only 12 deals were announced in second quarter 2009, down slightly from the 12 announced in the prior quarter and a steep drop from the 47 deals announced in the second quarter of last year.
Total deal value in first-half 2009 was approximately $4 billion, an 85 percent decline from the $27 billion reported in first-half 2008. In addition, average deal value declined to $153 million during the first half of 2009 from $297 million in first-half 2008, representing a 48 percent year-over-year decline.
Financial investors remain on the sidelines as stronger strategic buyers take advantage of opportunities to expand and weaker firms employ exit strategies. Although the percentage of deals driven by strategic activity in the first half of 2009 (69 percent) declined relative to the first half of 2008 (73 percent), results compare favorably with the three-year average (2006-2008) of approximately 68 percent.
The stressed global economy continues to have a negative effect on deal volume and deal value globally, according to a new PricewaterhouseCoopers LLP report on M&A activity in the chemicals industry, Chemical compounds: Second-Quarter 2009 global chemical industry mergers and acquisitions analysis.
While total deal volume was down only seven percent for the first half of 2009, compared to the first half of 2008, the volume of deals with a disclosed value greater than $50 million was down 43 percent. However, when compared to the first quarter of 2008, deal volume did pick up in the second quarter of 2009, increasing 15 percent to 187 deals. Despite the increase in the number of announced deals, the average deal size decreased to $72 million in the second quarter from $163 million in the prior quarter, indicating that while small deals continue, credit markets remain relatively tight, inhibiting the number large deals.
In the second quarter of 2009, North America and Asia Pacific saw the majority of M&A activity in terms of deal volume while North America and Western Europe dominated in terms of deal value, due to the announcement of a single large deal. In Asia Pacific, of the deals involving a company in China or India during the first half of 2009, 28 percent and 40 percent, respectively, were the result of an acquisition by a foreign entity.
Strategic investors continue to be the driving force in M&A activity in 2009, accounting for 87 percent of the deal value in the first half of 2009. Given the current economic conditions, it is not surprising that the deal value from financial investors is down from 2007 and 2008 levels.
Transportation and Logistics
The economic downturn continues to negatively impact deal activity and deal value, according to a new PricewaterhouseCoopers LLP report, Intersections: Second-Quarter 2009 global transportation and logistics mergers and acquisitions analysis. Deal volume in the T&L sector was down 45 percent in the second quarter of 2009, compared to the prior quarter, and overall deal value dropped 55 percent over the same time period. Deal activity during the first half of 2009 is significantly off the high pace of activity of 2007 and 2008. At the current rate, the 31 deals announced in 2009 with a value of $4.5 billion places 2009 M&A activity for the sector on a trajectory to be 67 percent below that of 2008 when 189 deals were announced with a value of $96 billion.
Interest in transportation and logistics targets has shifted among modes during 2009 compared with 2008. In particular, the relative interest in passenger air and trucking targets has increased significantly. Passenger air targets accounted for 30 percent of all deals in the first half of the year, up from 17 percent in 2008. Trucking targets also saw an increase, rising to 12 percent in the first half of the year from only five percent in 2008. Interest in passenger ground targets saw a marked decline, accounting for only 13 percent of targets in the first half of the year compared to nearly one-quarter (23 percent) of targets in all of 2008.
Financial investors are following the trend of the overall economy and engaging in fewer deals in 2009. In 2008, financial investors were involved in 35 percent of the deals, compared to only 16 percent of the deals through the first half of 2009.
The number of deals announced in the global metals industry during the second quarter of 2009 declined from the first quarter and remained far below the pace of 2008. However, the value of deals through the first half of 2009 is on track to be 85 percent higher by the end of the year than the total deal value for all of 2008, according to a new PricewaterhouseCoopers LLP report, Forging ahead: Second-quarter 2009 global metals industry mergers and acquisitions analysis.
During the first half of 2009, there were 34 deals announced worth $50 million or more, compared with 139 deals for all of 2008. Based on current deal volume, 2009 is on pace to fall short of 2008 numbers by 50 percent. This contrasts with a relatively high level of deal value announced during the first half of 2009, almost equaling the deal value announced during all of 2008. However, the primary contributor to this level of value was the announcement of one large deal. The potential for incremental large deal activity during the balance of 2009 remains limited, though the debt market has become more accommodating for investment-grade and high-yield corporate issuers compared with the first half of 2008.
Strategic investors continue to dominate the deal landscape for metals targets, accounting for almost 99 percent of deal value announced during the first half of 2009. This is an increase from 2008, when strategic investors accounted for 75 percent of deals. It is likely that strategic investors will continue to account for a large majority of announced deal value because of restraints on credit and the rationale for building scale and consolidation within the sector.
The pace of deals in the engineering and construction sector slowed substantially during the first-half 2009 compared with prior periods, according to the inaugural edition of the PricewaterhouseCoopers LLP report, Engineering growth: Second-quarter 2009 global engineering and construction mergers and acquisitions analysis. Total deals declined 67 percent to 42 in the first half of 2009 from 126 during first-half 2008. Deal value for the first half of 2009 totaled $12 billion, a 64 percent decline from the first half of 2008 ($33 billion).
While deal activity has remained weak on a year-over-year basis, there was an uptick in both deal value and volume between the first and second quarters of this year. In the second quarter of 2009, 27 deals were announced, nearly double the 15 deals announced in the prior quarter. And, total deal value jumped to $9 billion in the second quarter, compared to the $3 billion announced in the first quarter of 2009.
Furthermore, large deal activity (defined as those with a disclosed value of at least $1 billion) has declined significantly from historical levels. In first-half 2009, there were two large deals compared to eight in 2008, 29 in 2007, and 21 in 2006.
Economic instability has caused deal values in the aerospace and defense industry to plummet, according to the inaugural edition of the PricewaterhouseCoopers LLP report, Mission control: Second-quarter 2009 global aerospace and defense industry mergers and acquisitions analysis. Though the absolute number of deals remains at record highs, the total deal value and average deal value declined dramatically in the first half of 2009 due to the global recession, lack of liquidity, and uncertainty about when the economic recovery will begin.
In the first half of 2009, there were just six deals announced with values at or greater than $50 million. The total value for these deals was just under $600 million, a decline of 95 percent from the $11.7 billion announced in the first-half 2008. There have been no deals announced in 2009 with a disclosed value of greater than $1 billion, and the absence of these large deals has resulted in a significant decline in average deal values. The average deal value for announced deals with a value of at least $50 million for 2007 and 2008 were $654 million and $432, respectively. For first-half 2009, the average deal value for deals worth $50 million or greater was approximately $99 million.
For more information and to access the reports, visit: www.pwc.com/us/industrialproducts
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