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.
Despite Industry Headwinds, U.S. Manufacturers Optimistic

Despite Industry Headwinds, U.S. Manufacturers Optimistic

I received another survey of manufacturers’ economic outlook. This one shows definitely mixed opinions. Reading through the lines of the report reveals some uncertainty with shades of hope hear and there.

From the report:

While manufacturers across the U.S. are generally optimistic about revenues for 2017, small manufacturers are far more optimistic than larger manufacturers by more than a 2:1 margin.

That is just one of the findings from the 2017 National Manufacturing Outlook Survey, conducted by the Leading Edge Alliance (LEA Global).

“We found that 44 percent of small manufacturers expect revenue growth of 10 percent or more in 2017, while only 19 percent of large manufacturers do,” explained LEA Global President Karen Kehl-Rose.

With more than 250 participants, LEA Global’s survey report contains the expectations and opinions of manufacturing executives in more than 20 states across the U.S., producing a wide variety of products including industrial/machining, transportation/automotive, construction, food and beverage, and other products.

“Half of the large manufacturers we surveyed expect three to nine percent revenue growth this year, while a still strong 30 percent of small manufacturers have that same optimism,” Kehl-Rose added.

More results from the survey include:

  • Manufacturers are more optimistic about their local/regional economies than the national or global economies.
  • The top priority for manufacturers in 2017 is “cutting operations costs,” however, high-growth manufacturing respondents are more focused on “research and development,” with 12 percent of high-growth respondents reinvesting more than 10 percent of annual revenue.
  • Labor continues to be a challenge for manufacturers with 67 percent of respondents expect labor costs to “increase” and an additional 7 percent expect labor costs to “increase significantly” in 2017.
  • Appropriate cost allocation and accurate and timely data will become required capabilities for successful businesses in the industry.
  • More manufacturers will be considering both sales and mergers in 2017 as well as strategic acquisitions.

Kehl-Rose said U.S. manufacturing industry “headwinds” are significant and include both internal issues, such as high inventory-to-sales ratios, the cost of technology, and labor shortages, as well as external issues like the price of raw materials and strength of the dollar.

“To stiffen up and fight through these headwinds,” Kehl-Rose said, “strategic manufacturers should have ongoing conversations with all their advisors, including their accounting and tax provider, as to how to overcome these challenges and achieve their business goals.

“There are a range of solutions our members can offer manufacturers, from tax credits and entity structuring, to technology and transaction preparation,” Kehl-Rose said.

“What manufacturers cannot afford to do, is take a ‘wait and see’ approach,” she added.

About LEA Global

Founded in 1999, LEA Global, is the second largest international association in the world, creating a high-quality alliance of 220 firms focused on accounting, financial and business advisory services. LEA Global firms operate in 107 countries, giving clients of LEA Global firms access to the knowledge, skills and experience of over 2,000 experts and nearly 23,000 staff members.

Despite Industry Headwinds, U.S. Manufacturers Optimistic

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.

Despite Industry Headwinds, U.S. Manufacturers Optimistic

Manufacturers Turn Cautious on Global Economic Outlook

Many years ago I read a book about the stock market. It poked fun at the news reports that would go—there is a wave of selling. Hmm, for every seller there is a buyer. Someone bought all the shares being sold.

I bring that up just as a note about economics (and maybe life in general). Some things are good and bad simultaneously.

Take the strength of the dollar. American nationalists think that a strong dollar means a strong nation, or that we “won” some contest. However, for manufacturers and other suppliers looking to sell overseas a strong dollar makes our products more expensive and therefore less competitive.

The latest PwC US Manufacturing Barometer just came my way. It states, “Sentiment regarding the direction of the global economy took a sharp turn downward among U.S. industrial manufacturers, according to the Q3 2015 Manufacturing Barometer, released by PwC US today.  Global concerns also served to moderate optimism regarding the domestic outlook, while slowing plans to hire more workers.  At the same time, capital and operational spending forecasts among U.S. companies remained healthy.”

Details:

During the third quarter of 2015, optimism regarding the direction of the global economy dropped to 23 percent from 38 percent in the previous quarter and 30 percent in the third quarter of 2014.  In addition, pessimism rose to an equal level with optimism (23 percent), reflecting an uncertain outlook for international commerce.  Further, 40 percent of respondents indicated they believed the world economy was declining, showing greater concern than in the previous quarter (25% in Q2).

Conversely, optimism regarding the U.S. economic outlook remained positive but dropped to 60 percent in the third quarter of 2015 from 69 percent in the second quarter.  Despite the renewed sense of caution regarding the global stage, company revenue forecasts for the next 12 months rose to a moderately high 5.3 percent in the third quarter, compared to a forecast of 4.9 percent in the second quarter.

“U.S. industrial manufacturers became increasingly cautious on the outlook for the global environment as they assessed the impact of the slowdown in China and the strengthening dollar,” said Bobby Bono, PwC’s U.S. industrial manufacturing leader.  “Despite the downward turn in overseas sentiment, overall domestic growth prospects remained healthy and manufacturers continue to focus on further strengthening core products and services.  They are keeping their cash at home and directing investment toward enhancing their value propositions in an effort to remain competitive and drive future revenues.”

As a result of the decline in global sentiment, U.S. industrial manufacturers scaled back hiring plans in the third quarter, with only 37 percent planning to add employees to their workforce over the next 12 months, down 15 points from the 52 percent level indicated in both the second-quarter and year ago comparable period.  The total net workforce growth projection in the third quarter was minus 0.2 percent, indicating further cutbacks in hiring among industrial manufacturing firms.

Among the minority of panelists planning to hire within the next 12 months, the most sought-after employees will be blue collar/skilled labor (23 percent) and professionals/technicians (25 percent). Limited white collar support, middle management and sales/marketing hiring is planned.  “The drop in hiring plans may indicate an expectation for slower growth in the near future,” Bono added.  “Management teams will likely intensify avenues to improve productivity across their organizations, while continuing to search for professionals with strong technical skills.”

Despite the tempered global outlook, 37 percent of U.S. industrial manufacturers surveyed plan major new investments of capital during the next 12 months, up slightly from the second quarter and same period last year.  In addition, the mean investment as a percentage of total sales was a moderately high 5.6 percent, well above 3.3 percent in the second quarter and on par with 5.7 percent in last year’s third quarter.  Operational spending plans remained healthy as well with 82 percent indicating plans to increase operational spending, up from 75 percent in the second quarter and 69 percent last year.  Leading increased expenditures were new product or service introductions (48 percent), research and development (37 percent), business acquisitions (23 percent) and information technology (22 percent).

“In the face of global uncertainty and the impact of a strengthening U.S. currency, management teams continue to focus investment on developing new products and driving innovation in an effort to sustain and build market share,” Bono added.  “Companies are doubling down on what they do best and aggressively building their competitive moats.  At the same time, they are continuing to pull back from overseas expansion, with only five percent indicating plans to open facilities abroad.”

Looking at perceived barriers to entry, monetary exchange rate became the leading headwind to growth over the next 12 months, as indicated by 38 percent of respondents.  A year ago, it was only 14 percent (24 points lower).  Typical barriers to growth—lack of demand (32 percent) and legislative/regulatory pressures (25 percent)—were lower as monetary exchange rate took center stage.

PwC also surveyed respondents on investment in information technology, and found that 80 percent of manufacturers report having a multiyear plan (3-5 years) that addresses business capabilities and processes as well as IT systems.   Industrial manufacturing companies’ IT investments are made primarily to reduce costs (84 percent) and support growth (72 percent).  Overall, 90 percent are planning to invest in IT technologies over the next 12-18 months, with upgrading infrastructure the leader at 82 percent.

About the Manufacturing Barometer

PwC’s Manufacturing Barometer is a quarterly survey based on interviews with 60 senior executives of large, multinational U.S. industrial manufacturing companies about their current business performance, the state of the economy and their expectations for growth over the next 12 months. This survey summarizes the results for Q3 2015 and was conducted from June 24, 2015 to September 28, 2015.

Control Systems Integrators Set Meeting

Control Systems Integrators Set Meeting

 

CSIA LogoControl system integrators and industry suppliers from around the globe will gather in Washington, D.C., U.S., April 29 – May 2 for the CSIA 2015 Executive Conference. This is a conference I’ve never been able to work into my schedule, but reports from many people testify that this is a worthwhile conference. I know that the association has been working hard to promote integrators and to boost their skills.

Economist Alan Beaulieu, president of ITR Economics, will open the conference with his latest economic outlook for manufacturing. This year, Beaulieu will be joined on the stage by Nick Setchell, CEO of Practice Strategies, for a “stump the experts” session, during which attendees can ask the speakers questions on external and internal financial influences on their business. Their presentations will be the first of more than 20 educational sessions offered throughout the three-day event.

New this year are two workshops that will be held in conjunction with the conference. The Best Practices Training workshop will be offered Tuesday, April 28 – Wednesday, April 29, for those who are interested in learning more about the application of CSIA’s best practices to improve their system integration businesses. The training will focus on the management areas that are most challenging for growing integration companies.

A second workshop created for project managers, control engineers and designers will be held concurrently with the Executive Conference. A Commonsense Approach to Automation Upgrades and System Migrations will be offered Thursday, April 30 – Friday, May 1. Workshop participants are invited to participate in all conference social events.

Those attending the conference will have multiple opportunities for networking, including an industry expo, awards banquet and a closing reception during which Executive Director Bob Lowe will be honored. Lowe is retiring in June.

Last year, a record-breaking 538 people attended the conference, including more than 80 system integrators, partners and guests from outside the United States. See the complete details and register at the CSIA 2015 Executive Conference website.