PwC’s Q3 M&A Analysis of the Manufacturing Sector

PwC’s Q3 M&A Analysis of the Manufacturing Sector

I have received news of PwC’s Industrial Manufacturing Deals Outlook. I guess you have your good news and your bad news.

From the report’s summary: While disruptive factors are prevailing and point to an economic downturn, many of the positive factors we have highlighted in our previous publications are still relevant in Q3 2019. As stated in PwC’s publication “Winning through M&A in the next recession,” the M&A environment is cyclical and has historically followed economic downturns, as capital available for deals typically decreases; however, the next recession will be different. We believe the downturn will be unlike historical downturns as disruptive economic factors are partially offset by a few positive factors, leading buyers to continue to pursue M&A activity.

Positive factors impacting the deal-making landscape in 2019:

  • Record levels of dry powder from private equity funds and healthy corporate balance sheets coupled with the repatriation of cash for US-based multinationals indicate sufficient levels of capital to pursue acquisitions, which will prevent deal activity from dropping too low.
  • High valuations have been a factor for the decline in deal volume from YTD 2018 to YTD 2019. However, as the economic outlook declines, valuations will likely fall, which will provide opportunities for buyers with high levels of capital. If buyers are aggressive during the downturn, M&A demand should be higher than historical downturns.
  • The prominence of megadeals is reflecting a decoupling of the megadeals segment of the M&A market from the lower-growth global economic environment.

Disruptive factors likely to create a pause in deal making in 2019:

  • The Chinese and US economies are pointing to economic slowdowns. Chinese GDP growth in 2019 is expected to be between 6.2%–6.4%, a decrease from approx. 6.7%–6.8% in 2018. The US GDP annualized growth in 2019 is expected to be between 1.8%–2.3%, a decrease from approx. 3%–3.5% in 2018.
  • Uncertainties as it relates to length of economic slowdowns around the globe, Brexit, and the continued struggles to negotiate trade agreements and tariff concessions between the US and China, remain on the minds of deal makers.
  • The PMI index has dropped to 47.8 at the end of Q3 2019, which is the lowest it has been since 2009.

PwC also captured some quick highlights below:

  • Scale Transactions will Continue to be the Focus for the Industrial Manufacturing Sector
  • Macroeconomic factors – the trade war, slow GDP growth and high valuations – continue to affect the M&A environment across the industrial manufacturing industry.  The latest September numbers from the Institute for Supply Management also showcase the struggle the sector is experiencing with the U.S. manufacturing purchasing managers’ index coming in at 47.8%, marking the second consecutive month of contraction and was the lowest reading in more than 10 years.
  • So far in 2019, M&A activity in the industrial manufacturing industry has been driven by scale transactions, which is primarily focused on product, customer and geographic expansion. We believe this trend will continue into next quarter and 2020. Here’s a breakdown of Q3 2019 M&A analysis of the industrial manufacturing sector:
  • Total deal value declined by 32% to $18.1 billion when compared to Q2 2019. For YTD 2019, the deal value also declined by 16% to $64.5 billion vis-à-vis YTD 2018.
  • Deal volume in Q3 2019 and YTD 2019 declined by 10% and 11% over Q2 2019 and YTD 2018, respectively.
  • There was no megadeal in Q3 2019.
  • All the categories within the sector saw a decline in deal value during the third quarter except the Electronic and Electrical Equipment and Rubber and Plastic Products. However, the Industrial Machinery drove M&A activity with 40% and 35% in value and volume respectively.
  • North America’s deal value significantly declined by 55% in the third quarter compared to the previous quarter, but the region was the most active acquirer with 36% of deal volume, followed by Asia and Oceania.
  • Although there are factors that point to an economic downturn in the near future, we believe the next recession will be different as it pertains to the M&A environment and could potentially lead buyers to continue to pursue deals.

Executive summary

Worldwide cross-sector deal value decreased 13% from YTD 2018 to YTD 2019, while deal volume remained flat at a 1% increase during the same period. Consistent with cross-sector worldwide, Industrial Manufacturing value has decreased 16% from YTD 2018 to YTD 2019. The primary driver of value decline is related to the 11% decrease in deal volume during this period, which is reflective of some of the lowest quarterly activity since Q1 2014.

Consistent with the trend noted in our Q2 2019 publication, year-to-date activity has been driven by scale transactions, which are primarily focused on product, customer, and geographic expansion. The decrease in deal volume is a result of macroeconomic factors such as the lingering trade war, anemic GDP growth around the world, and high valuations. While overall deal value has seen a decline, the aggregate value of the top ten deals year-to-date has remained stable at $30.3 billion YTD 2018 and $31.4 billion YTD 2019. As such, these macroeconomic factors have not deterred deal makers from turning to M&A to meet their strategic objectives.

Trends and highlights

  • In Q3 2019, the total deal value declined by 32% to $18.1 billion when compared to Q2 2019. For YTD 2019, the deal value also declined by 16% to $64.5 billion vis-à-vis YTD 2018.
  • Similar trend can be seen in terms of total deal volume. Deal volume in Q3 2019 and YTD 2019 declined by 10% and 11% over Q2 2019 and YTD 2018, respectively.
  • Average deal size declined by 15% to $83.6 million in Q3 2019 compared to Q2 2019. The average deal size also declined by a mere 2% to $93.7 million in YTD 2019 vs. YTD 2018.
  • Out of the top ten deals in YTD 2019, four deals took place in Q3 2019. These four totaled up to ~$9.3 billion, and accounted for more than 50% of the total deal value for the quarter.
Industrial Merger and Acquisition Activity

Industrial Merger and Acquisition Activity

A couple of reports and studies on industrial manufacturing merger and acquisition activity have popped up recently. One came from my usual source—PwC. The other arrived from a new contact—Mergermarket.

First PwC.

The following is an analysis of Global Industrial Manufacturing deals with disclosed values greater than $50 million.

The Global Industrial Manufacturing sector closed 2016 with two strong quarters of deal activity. The deal market in the first half of 2016 was suppressed primarily due to geopolitical concerns such as Brexit, slowing growth in China, and the impending US presidential election.

Although 2016 finished strong, deal value ended down 3% and volume ended down 18% compared to 2015, principally driven by the softness in the deal market in the first half of the year.

The largest deal in 2016 was the Johnson Controls/TYCO megadeal valued at $22.7 billion, which occurred in Q1 of 2016. This drove the average deal size to $404 million from $342 million in 2015.

With two consecutive quarters of improved deal activity (both value and volume), we are optimistic 2017 will likely be a good environment for deal makers. The speculation of reduced tax rates, infrastructure investment, health care reform, and reduced government regulation in the US are positive factors for many deal makers. Further, similar to 2016, deal making in 2017 will be driven by inorganic growth strategies focused on product and service differentiation through access to new markets, customers, and technologies.

Key Trends and Highlights

  • Aggregate disclosed deal value for 2016 vs. 2015 was $91.3 billion and $93.7 billion, a 3% decrease.
  • Deal volume decreased by 18% in 2016 vs. 2015, with 226 vs. 274total deals, respectively.
  • M&A activity showed signs of continued comeback as Q4 2016 had 65 deals with a total aggregate disclosed value of $25.1 billion vs. 60 deals and $20.2 billion of aggregate disclosed value in Q3 2016.
  • The largest deals in Q4 2016 included CK Holdings intended acquisition of Japanese Calsonic Kansei Corp. for $4.5 billion and a US-based investor group’s acquisition of German Atotech BV for $3.2 billion.
  • There were three transactions exceeding $1 billion in Q4 by financial buyers with a total aggregate value of $9.2 billion, 37% of total value for the period.
  • M&A activity continues to be driven by deals in the Industrial Machinery subsector. Value increased 6% compared to 2015 and doubled compared to Q3 2016. This was the only category that recorded year-over-year growth and contributed to 59% of deal value and 41% of deal volume in 2016.
  • Asia & Oceania remains as the region with the highest M&A activity. In 2016, acquirers in the region accounted for 41% of deal value and 61% of volume.

Now Mergermarket

Mergermarket has released its Global Industrials & Chemicals M&A Trend report for 2016 (Q1-Q4). Take a look at the full report Here.

A few key findings include:

Despite a series of political shockwaves leading to market uncertainty, global Industrials & Chemicals’ M&A activity still managed to hit its highest level on Mergermarket record (2001). A total of 3,356 deals worth US$ 525.2bn makes it the most active sector based on deal count and up 11.3% in terms of deal value compared to 2015 (US$ 471.8bn)

The US continued to dominate global Industrials & Chemicals activity last year, with 832 transactions valued at US$ 207.2bn, accounting for nearly 40% of the sector’s overall value. Bayer’s headline- grabbing US$ 65.3bn takeover of Monsanto contributed almost a third of the sector’s deal value. The deal also helped Germany boost its outbound activity to US$ 142bn. Germany’s appetite for outbound deals will likely continue into 2017 as German corporates take on the Industry 4.0 challenge – a government-backed initiative to unite technology within the manufacturing industry – according to Mergermarket intelligence

Industrials & Chemicals in Europe (US$ 159.4bn, 1,404 deals) saw a 45.4% jump in terms of deal value compared to 2015 (US$ 110bn, 1,361 deals). Chinese investors in particular showed a growing appetite for Europe Industrials & Chemicals, leading to a record value of US$ 58.4bn with 55 deals. This however is expected to ease this year over protectionism concerns against Chinese buyers and domestic capital controls. As such, Chinese companies may avoid overseas acquisitions for now and focus on organic growth


Fueled by the government-backed Industry 4.0 initiative, in an effort to advance technology in the industrial space, German corporates are expected to have an even greater influence over the Industrials & Chemicals sector this year.

Activity across Asia-Pacific (including Japan) saw a significant uptick in the automotive sector driven by an increasing willingness from Asian industry players to carve out non-core businesses, such was the case in Nissan Motor’s US$ 4.5bn disposal of auto parts maker, Calsonic Kansei, to KKR. This is again likely to play a role this year as international industry players’ show an increasing hunger to acquire technology and know-how.

The rise of Chinese M&A has also contributed to the growth despite a relative slowdown in the manufacturing sector. A race to develop technology has created fierce competition among companies bidding for European and US targets to move up the supply chain and to gain industry know-how.

As the sector’s most dominant player, the US could experience a more uncertain 2017 as the effect of president-elect, Donald Trump, still remains a large unknown. But there are positive sounds being made with suggestions he would call for comprehensive tax reform and substantial changes to trade agreements, existing regulation and immigration policy, in addition to the claim that he would like to see significant investments in infrastructure.



Industrial Merger and Acquisition Activity

Global Industrial Manufacturing M&A Activity Shows Strength

Merger and acquisition (M&A) activity in the industrial manufacturing industry showed continued strength in the third quarter of 2015, with more than 50 deals worth more than $50 million for the sixth quarter in a row, according to Assembling Value, a quarterly analysis of global deal activity in the industrial manufacturing industry by PwC US. While growing uncertainty about the future prospects for the global economy has created serious underlying fears about the years ahead, manufacturing executives continue to re-evaluate their business portfolios, add scale to better leverage core capabilities, and divest or spin-off non-core operations.

According to PwC, there were 55 transactions (worth more than $50 million) in the third quarter for a total deal value of $20.9 billion. Both value and volume declined from the previous quarter which recorded 66 deals totaling $28.2 billion. However, deal activity year-to-date remained healthy with 180 deals raising $69.6 billion. Four megadeals (transactions worth more than $1 billion) were announced for a total deal value of $9.8 billion or 47 percent of the quarter’s total deal value.

“The continued interest in deal making in the third quarter has been especially notable given weakening global manufacturing activity and increased uncertainty regarding the economic outlook,” said Bobby Bono, U.S. industrial manufacturing leader for PwC. “Manufacturing executives in our latest Manufacturing Barometer reported a drop in optimism towards the world economy’s prospects as the economic slowdown in China, along with weak global demand and a strong dollar, continued to weigh heavily on the growth of the manufacturing sector. As we enter the final quarter of the year, we expect the level of deal activity to remain stable as mixed global economic results steer manufacturing executives toward further portfolio reshuffling.”

Similar to previous quarters, strategic buyers continued to align product portfolios with high-growth markets, such as automotive, aerospace, and electric through acquisitions. Strategic investors represented 66 percent of deal activity in the quarter. With plenty of cash at their disposal, both strategic and financial buyers have been active in deals involving diverse end markets, particularly in Asia and areas of Europe on the verge of recovery.

Bono added: “Strategic acquirers remain concerned about the broad economic environment and are taking a cautious approach to their deal strategies. While they continue to execute on sizable transactions, they are continuously evaluating their portfolios and taking advantage of opportunities to divest non-core assets. Divestitures continue to be a viable exit option, representing 27 percent of deal activity this quarter.”

On a regional basis, the U.S. share of global activity remained among its lowest levels in a decade as local activity in Asia continued to dominate deal making. Acquirers from Asia and Oceania accounted for 62 percent of total deal activity in the quarter, while targets in the region represented 56 percent of all deals. The majority (75 percent) of deals in the third quarter were local market deals; however, the strength of the dollar could lead to an increase in U.S. outbound deals in the coming months.

PwC’s industrial manufacturing M&A analysis is a quarterly report of announced global transactions with value greater than $50 million analyzed by PwC using transaction data from Thomson Reuters.

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