Industry consolidation through M&A and private equity

The current economic climate has seen a reduction in the pace of M&A activity. Overall value of deals in 2008 fell by 57% compared to 2007, reflecting the slowdown in large deals resulting from the weak financing environment, including a decrease in participation by financial investment buyers. Nonetheless, long-term drivers of deals in the segment, such as globalization and consolidation, are structural rather than cyclical. Industrial Manufacturing companies use M&A activity as a means to rationalise operations and focus on core activities and assets through acquisitions, divestitures, carve-outs, privatisation and other transactions. At an industry level consolidation helps the sector to improve its financial strength, increase negotiating power with customers and suppliers, and boost capacity utilisation.

Looking forward, deal activity is likely to increase with an improvement in economic growth or even an improvement in growth expectations. Still, global economic and credit market concerns could lead to an increase in distressed deals in the sector, giving a counter-cyclical boost to short-term industrial manufacturing deal activity. Deal activity within China grew in pace in late 2008, while Chinese manufacturers continue to pursue acquisitions in Europe and North America.

However, investors must approach acquisitions with caution. In addition to individual targets, investors must understand the particular intricacies and risks affecting each industrial manufacturing sector. Timing is also of the utmost importance. As the outlook for some sectors may worsen before improving, investing too early may create a need for additional cash injections and, in the extreme case, a bankruptcy filing.

How PwC can help you

At PwC we provide a full range of transaction services to help companies through this continued industry consolidation, assisting on acquisitions, divestitures, carve-outs and many other transactions. Whatever your requirement – be it Financial Due Diligence, Private Equity, Corporate Finance, Technical Accounting, Reporting and Auditing, M&A pre- and post–transaction services, international tax planning or risk management – we have a team in place to assist you. We also provide cost effective solutions to help emerging players from the BRIC countries understand new manufacturing markets, barriers and risk of entry, and challenges of doing business in new markets.