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Merger and acquisition activity in the global industrial products (IP) industry saw a substantial bump in value this past quarter, thanks largely to the industrial manufacturing sector, PwC said, citing a recent analysis.

There were 169 transactions exceeding $50 million in value in the third quarter, totaling $65.7 billion, according to PwC’s IP M&A evaluation. In contrast, there were 171 deals for $53.3 billion in total value reported in the previous quarter. Overall, that’s a 23 percent increase in value.

This might be a rather promising sign of things to come, said Robert McCutcheon, PwC’s industrial products leader, emphasizing that companies with strong balance sheets continue to explore and evaluate various M&A opportunities despite ongoing concerns about the global economy, in particular the Eurozone and U.S. fiscal policy.

“I believe we are beginning to see a bounce off the bottom,” he told Leo Rommel of Industry Today. “The recent uptick, in my view, is relatively modest, but overall I think it’s an indication of the optimism that is consistent with what we are seeing in some of our other recent surveys.”

Take, for instance, PwC’s third-quarter Manufacturing Barometer, which in October said optimism among U.S. industrial products manufacturers remained at a high 60 percent level. Optimism about the world economy over the next 12 months also saw a sizeable increase, from 31 percent to 40 percent.

“This is a constant data for me that leads me to believe that we are poised for continued M&A activity,” McCutcheon said.

The analysis entailed merger and acquisition activity across the following six IP industries:

  • Aerospace and defense (A&D);
  • Chemicals;
  • Engineering and construction;
  • Industrial manufacturing;
  • Metals;
  • Transportation and logistics.

Four of those six sectors reportedly posted moderate sequential increase in M&A volume. Chemicals led the way with 23 transactions, up from the 18 reported in the second quarter.

But in terms of total deal value, first-place honors went to industrial manufacturing, which posted $29.4 billion altogether, up from $12.7 billion in the last quarter.

FEWER MEGA DEALS
But such transactions so far have not been what PwC considers mega deals, categorized as transactions with a value exceeding $1 billion. In fact, such deals remained at low levels, with four of the six IP sectors recording just one mega deal apiece in the third quarter.

Instead, much of the activity revolved around small and middle market transaction, the survey showed.

“That’s exactly what I would expect to happen,” McCutcheon said. “It is consistent in my view that if you are optimistic about your growth prospects, the next logical place is to again be thinking about inorganic growth. And while there’s cautious optimism, there’s also uncertainty in the marketplace, either from an economic or geo-political perspective. So, rather than jumping in head first with a mega deal, you dip your toes in. You start to do some smaller deals and then grow into some of the larger deal activity.”

An exception to this, according to the analysis, was, again, the industrial manufacturing sector, which recorded six mega deals during the third quarter, twice more than it booked in the second quarter.

While certainly a stand-out figure, this number did represent a slight decline from the third quarter of 2012, when the sector inked eight mega deals, PwC said.

STRATEGIC INVESTING
Strategic investors continued to drive the bulk of activity during the last quarter, reflecting their focus on longer-term investment initiatives.

“We saw much of this activity in the chemicals sector where several companies engaged in strategic reviews of their assets to better align their business strategies with growth opportunities ahead,” McCutcheon said. “In the third quarter, we witnessed a decline of involvement from financial investors across every sector. The exceptions were the A&D and industrial manufacturing sectors where PE firms are looking for opportunities to exit their investments made just before the economic downturns to retrieve some of their capital.”

Local market deals, at the same time, continued to drive the majority of IP M&A activity in the third quarter, in line with the past several quarters, recording 107 local deals worth more than $50 million.

Moreover, local deals represented 75 percent of A&D transactions and 72 percent of deal activity in transportation and logistics. Cross-boarded deal activity, on the other hand, remained somewhat low, accounting for 37 percent of total deal volume.

LOOKING AHEAD
McCutcheon said PwC doesn’t expect to see any major or sizeable surge in M&A activity in the near future. You can thank man-made uncertainty for that. October’s partial government shutdown is one example. Domestic policy and a still wobbly domestic economy are two more. Overseas, the Eurozone remains a concern.

“Both economic uncertainty and political uncertainty stifles investment,” he said. “When you introduce uncertainty, it can have a negative effect or impact on deal activity and on the willingness to invest or it may reduce the amount that companies are willing to invest or put at risk.”

That said, he sees good signs all around. Numerous governments are reportedly looking to rejuvenate their economies, especially those in developing markets. That means more opportunities for new deals.

“We believe that M&A activity will continue to grow in the future,” McCutcheon said. “It’s going to be interesting to watch the demographics of that type of activity, particularly on a geographical or regional basis.”

He adds: “I believe that some of the mega trends that we are seeing longer term in regards to shifts in economic power, demographics, and urbanization are going to drive behavior in the M&A space. They are going to have an impact in terms of the regions that are most likely to be affected.”

About PwC’s Industrial Products practice
PwC’s Industrial Products (IP) practice provides financial, operational, and strategic services to global organizations across the aerospace & defense (A&D), business services, chemicals, engineering & construction (E&C), forest, paper, & packaging (FPP), industrial manufacturing, metals, and transportation & logistics (T&L) industries. With more than 31,000 professionals located in over 150 countries, PwC’s IP global professionals deliver a wide range of industry-focused tax, assurance, and advisory services to address critical business issues.

Volume:
12
Issue:
17
Year:
2013


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