Industrial manufacturing: Deals 2022 midyear outlook

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Industrial manufacturing M&A stable despite market headwinds

Industrial manufacturing M&A was strong in the first half of 2022 but slower than in 2021, which was driven by pent-up demand. Average deal value decreased over 30% in the first half of 2022 from the second half of 2021. Activity in the first half of 2022 was  focused less on transformational megadeals (transactions exceeding $1 billion in deal value) and more on smaller, targeted acquisitions and divestitures. This was driven by buyers building out platforms and filling in strategic market gaps, sellers divesting non-core divisions or assets and broad concerns of US regulatory scrutiny.

Revenue growth, a resilient supply chain and margin expansion from digital automation are focusing business transformation. In many cases, companies are leveraging the speed to help achieve such transformations that M&A can provide. Companies, however, face ongoing market headwinds of economic and geopolitical uncertainty, including record-high inflation, which will likely continue to influence the M&A landscape into the second half of 2022. 

Industrial manufacturing deals outlook

Industrial manufacturing M&A activity was stable in the first half of 2022 as deals progressed toward completion, despite uncertainty from global economic and market influences. These influences — such as inflation, volatile raw material prices and availability and freight costs — will likely challenge M&A through the rest of 2022 and into 2023. Given the potential shift to onshoring for manufacturing, localization rather than cross-border transactions will likely be a primary focus area for M&A in the near-term.

While some expect the global economy is headed for a near-term slowdown, underlying economic fundamentals remain strong. Private equity firms with dry powder and corporations with significant cash balances are expected to drive significant M&A activity. This, coupled with a large number of carve-out divestitures being contemplated, provide supply for potential transactions. 

Key deal drivers

Navigating uncertainty

A targeted focus may be necessary to manage headwinds from global and economic uncertainty.

Given global forces are likely to continue to drive uncertainty into M&A processes, private equity and strategic buyers alike should critically evaluate individual transactions in a targeted and strategic manner. 

Sellers may find setting a realistic projection plan and addressing these market risks to be a moving target. They may instead find assessing upside and downside risks to the projection plan to be a more successful approach for discussions with potential buyers. 

Buyers, on the other hand, may then have the challenge of securing lending for a transaction in uncertain global market conditions. M&A success may depend on using a focused approach to acquisitions, including factoring in downside market risks.

Increasing resilience and security

Securing a stable supply chain continues to be a focus area for M&A.

Supply chain shortages led many companies to focus on M&A to mitigate this risk, whether through onshore or nearshore facility acquisitions or through the acquisition of suppliers. Uncertainty from suppliers in Asia and Eastern Europe are driving these considerations and related actions, and companies are considering M&A rather than building due to the time-sensitive nature of the needs. Beyond Russia’s invasion of Ukraine, the COVID-19 lockdowns in China drove a 3% decrease in industrial production in April 2022 alone, resulting in further delay of global backlogs and increased supply costs. This, along with increased freight costs due to oil prices, is forcing companies to take action — and using M&A to do so. The importance of a resilient and cost-effective supply chain has never been so critical; however, these are changes not taken lightly. 

“M&A activity in industrial manufacturing is expected to remain stable in the rest of 2022 despite global headwinds as companies deploy capital to focus on supply chain resilience and business transformation, while divesting non-core assets after portfolio reviews.”

— Michelle Ritchie, Industrial Products Deals Leader

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Michelle Ritchie

Michelle Ritchie

Industrial Products Deals Leader, PwC US

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