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Manufacturing sector produces further growth in mergers and acquisitions |
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Deal making in the global industrial manufacturing industry is growing strongly and looks set to remain at high levels in both the short- and long-term.
A new report by PricewaterhouseCoopers (PwC) “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.
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.
Deal values in Canada also jumped from $500 million in 2005 to over $3 billion in 2007, on the back of four notable transactions. In August 2007, Danish engineering group FLSmidth bought the process division of industrial and filtration equipment manufacturer Groupe Laperriere & Verreault for $875 million. In September 2007, hazardous devices manufacturer Allen-Vanguard bought bomb disposal equipment provider Med-Eng Systems for $606 million. In October 2007, private equity firm 3i made a significant investment in hot runner market leader Mold-Masters. And in December 2007, private equity firm Onex purchased Husky Injection Molding Systems for $987 million.
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.
“Financial buyers were involved in fewer deals in the first quarter of 2008 but there is still considerable private equity fund potential,” says Dean Mullett, leader of the Canadian Industrial Products practice. “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.”
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.
To view the report, visit www.pwc.com/manufacturing.
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