Industrial Manufacturing Leads in M&A Activity

The global industrial products (IP) industry experienced an increase in deal volume over the course of 2011—801 deals worth more than $50 million compared to 783 deals in 2010—with industrial manufacturing and metals markets leading merger and acquisition (M&A) activity, according to a series of quarterly M&A reports released this week by PwC US.

The majority of deals within the IP sector were driven by companies focusing on smaller deals, an increase in divestitures and an uptick in local deals to create synergies. In addition, while strategic investors dominated overall activity, financial investors increased their participation in 2011 compared to the prior year.

PwC’s IP practice examined activity in the fourth quarter of 2011 and full year 2011 across six sectors: aerospace & defense (A&D), chemicals, engineering & construction, industrial manufacturing, metals and transportation & logistics.

The industrial manufacturing sector saw the largest increase in activity with deals worth more than $50 million totaling 161 deals in 2011 compared to 135 deals in 2010. The metals industry also increased in activity with 122 transactions worth more than $50 million in 2011 compared to 106 deals in 2010. Although total industrial products deal volume increased, total deal value for transactions worth more than $50 million decreased to $362.5 billion in 2011 from $462.6 billion in 2010.

Mega deals or transactions worth more than $1 billion slightly decreased in 2011 with a total of 72, compared to 80 mega deals in 2010. This contributed to a lower average deal value for deals worth more than $50 million—$45 million in 2011 compared to $59 million in 2010.

“2011 was all about smaller deals in industrial products as dealmakers remained conservative focusing on deals that were seen as less risky and that needed smaller levels of capital in today’s uncertain economy,” said Bob McCutcheon, U.S. industrial products and metals industry leader at PwC. “This trend was exemplified across the sector and especially in A&D where it was a record year for volume, mostly driven by smaller transactions, though we also note that a record deal in terms of size was announced in this sector.
“Deal activity in 2012 will depend on more stabilized financial markets, a global recovery and abatement in concerns over the European debt crisis. An uptick in action across industrial products in 2012 is anticipated, and our latest Manufacturing Barometer reports that U.S. industrial manufacturers are expected to continue to increase investment spending in the year ahead, including operational spending, and plans for M&A with a significant emphasis on expanding into new markets.”

A breakdown of PwC’s analysis of M&A activity and outlook for IP follows:

Transportation & Logistics – Overall deal volume and deal value stayed steady with 170 deals valued at $50 million or more in 2011 compared to 186 deals in 2010 but saw a drop in the fourth quarter of 2011 when compared to the previous quarter. The fourth quarter of 2011 produced three mega deals, which included a transaction valued at $4.2 billion that was also the largest for the full year. Emerging markets returned in the fourth quarter of 2011 with a majority of activity being driven by Europe and Asia as companies focus on consolidating to build economies of scale. Shipping and infrastructure deals are strategically positioned to lead the transportation & logistics industry in deal activity in 2012 as a result of shipping companies consolidating due to ongoing capacity issues and emerging markets investing in airport, ports, and roads.

Industrial Manufacturing – After a strong start at the beginning of 2011, deal activity in the second half of the year softened with a shift away from larger, more transformative and impactful transactions. There was one mega deal in the fourth quarter of 2011 where both companies operated within the same semiconductor machinery manufacturing/chip equipment segment, indicating another trend in the market: a company’s desire to pursue acquisitions to establish a technological edge over its peers. The U.S. maintained its position as one of the most active countries in activity, followed closely by China and Japan, and interestingly, new emerging markets such as Mexico, surfaced as players in the deal arena in the fourth quarter of 2011. Global industrial manufacturing deals in the first half of 2012 are expected to remain fairly even with 2011 activity, but if the Euro crisis is resolved, companies hungry for growth along with strong fundamentals and cash-rich balance sheets could spur an increase in activity in the second half of 2012 and early 2013.

Aerospace & Defense – In 2011, there was a big increase in both deal volume and value for aerospace targets and when considered alongside the higher sales multiples awarded to aerospace, rather than defense, this part of the sector has a more favorable outlook for 2012. Mega deals also made a comeback in this sector with six mega deals in 2011, up from four in 2010. A&D continues to globalize as non-US entities increase their competitiveness, which is supported by increasing defense budgets and air travel in several overseas regions. Foreign countries, particularly emerging markets, are seeking to take advantage of this demand shift by fostering their own domestic industries. China seems well-positioned to advance its national aerospace industry given the relative level of domestic demand as well as technological help from Western suppliers. Deal volumes are expected to continue their gradual shift toward non-U.S. parties while large deals involving the U.S. continue to drive overall deal value in this sector.

Chemicals - Overall deal volume and deal value were down in the fourth quarter of 2011, but in all of 2011, deal volume increased slightly with a declined deal value from 2010. There was only one mega deal during the fourth quarter of 2011, which contributed to a total of 17 mega deals in 2011 with a combined value of $59.7 billion compared to 16 deals in 2010 valued at $91.4 billion. North America drove local deal value in 2011 with $31.5 billion and deal volume was driven by 41 local deals that were worth more than $50 million in Asia and Oceania, many involving China. Europe was the primary driver for outbound volume and value with 19 transactions worth more than $50 million and a total value at $11.7 billion in 2011. The dominant chemical end-user industries such as automobiles, durable goods and construction showed improvement in 2011, but have not returned to pre-recession levels.

Engineering & Construction–The majority of deal activity in the fourth quarter of 2011 was from small, bolt-on acquisitions, which dropped the average deal value to 2009 low levels of $354 million, but recorded two mega deals during this period. With the combination of a sluggish U.S. recovery, reductions in federal and municipal spending and political gridlock, non-U.S. affiliated deals took the lead in deal activity during the fourth quarter of 2011. Asia and Oceania led deal activity with China as a major player as a result of the Chinese government’s infrastructure and energy efficiency activities. While many companies in this sector might employ a “wait and see” strategy in the first half of 2012, shareholders’ pressure to deploy cash abundances and generate greater returns are likely to spur activity in the second half of the year.

Metals – In 2011, there were 16 more deals that were worth more than $50 million than in 2010, but deal value declined to $55.2 billion from $92.6 billion. This 40 percent decline in value drove a decrease in average deal value as well, from $874 million to $452 million. Asia and Oceana drove overall deal value in 2011 with the majority of local deals also led by Asia and Oceania. This region is expected to continue to drive local deal activity in 2012 as China makes progress in consolidating its domestic metals industry. Given the current economic environment, the metals sector could see a moderate deal growth into 2012. However, the general collapse of aluminum prices impacting the bottom lines of large producers, accumulating stock levels and soft economic conditions further impacting pricing and the potential of a slowdown in the steel industry in 2012, given weakening global demand and the tighter control of the Chinese real estate market.

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