September 7, 2022 Back to Basics: How Leaders Can Navigate Uncertainty

PwC’s Michelle Ritchie explores top takeaways from PwC’s 2022 Industrial Manufacturing Midyear Deals Outlook.

By Michelle Ritchie

Increased geopolitical tensions, soaring inflation, and gaps in consumer trust paved the way for an uncertain economic future. M&A activity across sectors likewise reflected these challenges. However, despite ongoing uncertainties, PwC’s Industrial manufacturing: Deals 2022 midyear outlook found slow but steady growth within the industrial manufacturing sector.

To stay ahead of the competition during these challenging times, industrial manufacturing leaders will have to get back to fundamentals, including strategic growth, assessing uncertainties and securing a stable supply chain process. Strategic growth, using effective portfolio review, will result in targeted areas of acquisitions and divestitures of non core assets – both of which will drive continued deal activity. Assessing uncertainties in the underlying business and ensuring a resilient and cost-effective supply chain has never been more important and may be achieved in part through M&A activity.

Midyear 2022 Industrial Manufacturing M&A Outlook

Although slower than in 2021, industrial manufacturing M&A was stable in the first half of 2022 driven by pent-up demand and strategic investments.

The average deal value decreased by 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.

Buyers were seeking to build out platforms and fill in strategic market gaps. Sellers began divesting non-core divisions or assets after internal portfolio reviews. The US regulatory environment also influenced deal dynamics, driving fewer transformational deals.

Revenue growth, a resilient supply chain, and margin expansion from digital automation are focusing business transformation. In many cases, companies are leveraging M&A to achieve these goals (given the speed over organic changes). However, companies face ongoing market headwinds of economic and geopolitical uncertainty, including record-high inflation, which will continue to influence the M&A landscape into the second half of 2022.

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 & availability and freight costs — may challenge M&A through the rest of 2022 and into 2023. Given the potential shift to nearshoring for manufacturing, localization rather than cross-border transactions will likely be a primary focus area 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 continued M&A activity. This, coupled with carve-out divestitures being contemplated following portfolio reviews, provide supply for potential transactions. Despite headwinds, PwC’s 2022 midyear deals outlook refected a back to basics outlook for the industrial manufacturing sector.

Weathering the Storm and Looking Ahead

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, 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.

As the market looks forward to the second half of 2022, M&A activity in industrial manufacturing is expected to remain stable despite global headwinds as companies deploy capital to focus on supply chain resilience and strategic initiatives, while divesting non-core assets after portfolio reviews. From battling a global pandemic to rising inflation and global social and economic uncertainty, industry leaders have found ways to survive, innovate and thrive by getting back to basics – which will serve them well going forward.

Michelle Ritchie is PwC’s US Industrial Products Deals Leader. She advises clients on acquisition and divestiture activities. Michelle’s worked exclusively on transactions for 20+ years, from large, multinational transactions to smaller bolt-ons, scaling the advice to match the transaction. While working across many industries, Michelle has spent a lot of time with the nuanced complexities of aerospace and defense, medical device and technology companies. She has helped both private equity and corporate clients in the US and Europe, from San Jose, California, to Washington, DC, to London.

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