Global M&A Industry Trends in Industrial Manufacturing & Automotive Sectors

Automotive

Automotive has outperformed expectations despite COVID-19, and M&A activity continues in the sector. OEMs are divesting non-core businesses and activities to fund investments in strategic priorities. Recent strategic reviews are triggering reorganisations, with M&A a key tool for rebalancing activities geographically and maintaining cohesive brand portfolios.

Digital transformation continues to be a key priority as OEMs shift their business models towards electric and autonomous vehicles. While many are conducting targeted searches in the hope of a bargain, extensive buyer interest and ongoing support from governments mean that bargains are rare, and valuations remain high for tech-enabled assets.

Access to the right skills remains a challenge, particularly advanced coding capability. OEMs may pursue large deals to close this gap quickly. Alternative strategies involve alliances and joint ventures, either between traditional OEMs or with pure-play software companies.

On the supplier side, distress remains a key concern and scale is becoming increasingly important. Smaller, family-owned suppliers in particular are facing costly transformations to maintain relevance with OEMs that have accelerated their shift towards e-mobility and sustainability. We expect an increase in deal activity in this space, as smaller suppliers reconsider the benefits of belonging to a larger group or seek supplementary private equity funding. We also see the potential for a wave of IPOs in late 2021 and 2022 among midsize suppliers seeking access to public markets.

Last-mile delivery services and the technology and software platforms that underpin them have grown in importance during COVID-19 as online sales surged and consumers relied increasingly on home delivery. New OEMs are entering the space and receiving significant PE interest. The most successful players will be those that can overcome operational challenges, particularly availability of maintenance networks. Alliances between new entrants and traditional OEMs could also create market value.

Distress in the sector has been limited so far, but this could change soon. The resurgence of high infection rates triggered further restrictions across key markets in November, December and January. As the economy absorbs the impact of these measures, another demand slump may follow. When governments eventually discontinue their support schemes, record-high levels of deals could occur as distressed assets come to market.

Engineering and construction

The engineering and construction industry continues to experience relatively little distress. Companies in this sector not only came into the pandemic with low leverage ratios and extensive project backlogs, but they also have taken advantage of government support schemes. This was driven by engineering, construction services and construction materials – exemplified through the recent merger of BMC with Builders FirstSource, both building materials and services suppliers.

Government investment, through plans such as the EU’s Resilience and Recovery Facility, will support growth in the infrastructure segment. Businesses serving this space may come to market this year. The residential segment is also strong, attracting unusually high levels of investment from both PE and corporates across the value chain. The commercial segment, conversely, appears more mixed as end customers reconsider their needs for office and retail space.

The sector is also continuing its digital transformation, with some M&A activity focused on helping companies quickly gain the internal capabilities they need to improve productivity and offer tech-enabled services. We note a recent increase in interest in the software and systems that enable firms to assess their ESG positions.

ESG is increasingly important worldwide, affecting profitability, competitiveness and exit opportunities. EU proposals to increase carbon-reduction targets and include buildings in the carbon-trading scheme threaten substantial cost increases for European segments with high carbon footprints, such as building materials. Poor ESG performance may also impact competitiveness. In Australia, for example, certain poorly performing assets that don’t meet the ESG requirements established by private equity funds have had trouble attracting bidders. In the US and several other countries, construction tenders are starting to incorporate ESG criteria.

Industrial Manufacturing

The fate of industrial manufacturers is intrinsically linked to that of the end markets they serve. In industries like automotive and aerospace that have experienced a sharp decline in demand, conditions are challenging. Conversely, where COVID-19 has spurred growth, such as in packaging, the outlook is brighter.

Manufacturers are refocusing on productivity, particularly in Europe. Right-sizing of operations to improve utilisation will drive site sales and closures. More broadly, we anticipate that corporates will continue to evaluate their core offerings with an eye towards divesting activities that no longer increase efficiencies and support capabilities. We also expect corporates to consider how they can upskill their workforces and improve operational efficiencies, leveraging mergers and acquisitions alongside organic approaches.

We anticipate increases in vertical integration and consolidation. With growth difficult to achieve in declining or flat markets, businesses will be particularly keen to expand their share of the profit pool through the acquisition of supply chain partners so that they can streamline overall operations. Consolidation will also enable them to drive cost efficiencies through scale. Others may enter markets where growth can still be found; for example, several Japanese automotive suppliers have shifted their focus to China.

Technology is fundamental to all of these strategies and continues to be a focus of M&A activity. Many manufacturers are looking to services as a new and recurring source of revenue. By incorporating sensors, software and other technology into manufactured components, businesses can offer maintenance services and new data analytics products. In addition, COVID-19 has highlighted the importance of digital, low-touch, go-to-market channels. Companies are evaluating deals to accelerate technological transformation, particularly in their sales and delivery processes.

Business Services

The relative resilience of business services companies has sparked interest among investors. For private equity, the attraction lies in business models with recurring revenue and significant buy-and-build opportunities. Corporates, meanwhile, have focused on geographic expansion and regional consolidation, which offer growth potential and scale benefits. Even in territories where deal activity centres primarily on divestment of non-core divisions, business services players remain actively engaged in acquisitions. For example, Japanese Outsourcing Inc. recently acquired HR outsourcing provider CPL.

This investor interest has sustained high valuations in the sector, but ongoing market uncertainty and questions about performance have made it difficult for buyers and sellers to align on price. While sellers with resilient, high-quality revenues are proceeding to sale, we anticipate that strong businesses whose recent financial performance has been volatile may postpone coming to market until they can demonstrate stability.

In line with expectations expressed midyear, facilities management, business process outsourcing and security services have been particularly active in the past six months. This trend is expected to continue—and we anticipate the enduring effects of COVID-19 to result in a greater need for logistics and distribution services, making these businesses attractive acquisition targets.

Further, market shifts and COVID-19-related restrictions have accelerated business transformation and elevated the value of tech-enablement as a source of resilience. The ability to leverage digital platforms and virtual service delivery to achieve scale at higher margin is particularly attractive to investors. While these assets continue to attract substantial interest, investors must carefully consider whether the technology is truly providing a sustainable and differentiated advantage.