M&A in the industrial sector – 2016 is set to be an interesting year
February 04, 2016
“2015 becomes the biggest M&A year ever” – The Wall Street Journal
“Record year for M&A with big deals and big promises” – Financial Times
“For the first year ever, global M&A deals surpassed $5 trillion” – Business Insider UK
“2015 was a banner year for corporate deal-making, as global merger and acquisition activity reached an all-time high, exceeding the previous high water mark set in 2007” – Forbes / Business
Bold headlines you might think. But is this overall merger and acquisition (M&A) trend mirrored by deals in the industrial sector?
Different market dynamics
In many sectors disruptive technologies are forcing companies to make strategic acquisitions to stay ahead - sectors such as technology, pharmaceutical, media and healthcare. Deals in the industrial sector can also be strategic and target niche disruptive technologies, but other forces drive industrial deals as companies search for portfolio optimisation, cost synergies, purchasing power, lower cost manufacturing, sales coverage and greater vertical integration.
As a result, global industrial M&A deals were are also at a high level in 2015 with deal values of $320bn, showing consistency with the wider global trend. Global industrial deals were actually up 60% compared to average levels over the past five years (Average deal values in the preceding five years were $193bn).
Industrial deal values rose in every region globally in 2015. But if you look at the UK in isolation, the small number of transactions makes total deal values look volatile. While total UK deal value in the industrial sector was $8.8bn (less than 2014), in general the annual total of industrial deals was relatively flat compared to the average of $10.3bn in the preceding five years. The number of deals also remained flat compared to previous years at 265; this contrasts to the global trend that shows a 15% decline in the number of global deals.
Investor confidence on the rise?
Globally, while deal value is increasing, the number of deals transacted has steadily declined since 2011. This suggests investors and corporates are regaining confidence after the financial crisis to make bigger plays and accept larger risks. This trend is consistent across all geographic regions.
Globally, construction, machinery and automotive sectors represented three quarters (75%) of all industrial deal values in 2015. These sectors have all seen deal value consistently increasing. Only the metals and packaging sectors, representing c.18% of industrial sector M&A deals remain flat by contrast.
What does 2016 hold in store?
2015 was clearly a bumper year for M&A in the industrial sector. But does this trend provide any indication on the number and value of deals likely to complete during 2016? I think that, on a global level, industrial deal volumes will continue at a high level, albeit in potentially different industry sub-sectors and regions.
Drivers for the future
- High level of activity - Despite the current volatility in the global financial markets, I expect 2016 global M&A activity in the industrial space to continue at a high level. A number of major potential carve outs from large corporates such as Philips, Rexam/Ball, Emerson Electric and Sandvik have already been announced. This could fuel further industrial sector M&A.
- Deal size set to rise - The average size of deals in the industrial sector has grown consistently over the last two years while the number of deals has declined. The number of potential large corporate carve-outs increased in 2015. This suggest companies are repositioning their portfolios and plan to divest stagnating or low growth businesses in order to concentrate on newer technologies which can drive future growth. I expect this trend to continue in 2016
- US uncertainty –Rising interest rates and the strengthening US dollar could also be headwinds for the industrial sector, particularly for companies with an export focus. This year’s presidential election may also create some uncertainty for US M&A.
- Asian expansion - Regionally the economic slowdown in China will impact exporters to the region and inevitably reduce the attractiveness of the region to investors. Indian Prime Minister Modi’s “Make in India” campaign may well make the country more attractive to industrial investors searching for lower cost production and an alternative to China.
- Strategic M&A – The automotive sector may be the only part of industrials that will continue to see strategic M&A as car manufacturers scramble to acquire technology in areas such as connectivity and battery management.
- Private equity interest - Many industrial sectors continue to be attractive to private equity buyers, with 25% of deals being driven by financial sponsors in 2015. I see this continuing into 2016.
- UK unpredictable - Industrial sector deal volumes within the UK will continue to be lumpy, making it impossible to predict any specific trend for deals involving UK based companies.
- Price of oil - The low oil price will inevitably force some UK industrial companies serving this sector to restructure. Some are likely to become targets for investors seeking synergies or growth.
- Surplus steel - We have already seen the impact of surplus global steel production capacity making the news across the UK recently. I think we’re likely to see a few more restructuring deals on the table during 2016.
- Financial strength - Most of the UK headquartered FTSE350 industrial manufacturers and their US peers are well positioned and have the financial strength to target strategic acquisitions.
So I think we’re set for some interesting times in the industrial sector in 2016. I believe that despite concerns of economic stability, for UK Industrials and Private Equity there are still many reasons to look hard at M&A opportunities that may arise in 2016. What will drive your investment or expansion plans in 2016? How do you think things will play out? Share your thoughts below or schedule a meeting to discuss your situation in confidence.