In recent years, private equity firms have been responsible for a significant proportion of deal activity in the global Industrials sector, however a material increase in the cost of capital and tensions in the debt markets are making it more challenging for transactions relying on leverage to succeed. Strategic buyers, particularly in the Industrials sector, now have distinct advantages due to their resilient valuations and strong balance sheets, positioning them as frontrunners on the hunt for high-quality assets.

In Europe for example, private equity was responsible for around 44% of Industrials deals in 2019, dropping to 36% in 2022, and has fallen further in H1 2023, accounting for only 26% of deals.[i] This landscape has undergone a significant shift, with strategic buyers now accounting for a far greater proportion of transactions completed from 53% in 2019, up to 64% of all Industrials deals competed in H1 2023.[ii]

Strategic ‘edge’

In recent years, strategic buyers have been outbid by private equity firms that could rely on low-cost debt to help finance their acquisitions. Today however, strategics are in a favorable position, particularly those with cash-heavy balance sheets or acquisition models that don't heavily rely on debt financing.

Industrial company valuations reached recent peak levels in late 2021, however by Q1 2022, multiples and average transaction values had weakened due to macroeconomic factors including supply chain issues, inflation and interest rate rises, before beginning to recover towards the end of the year[iii] (please see ‘Price evolution’ chart). Overall, however, Industrial companies stood out with relatively stable multiples, unlike sectors such as technology which saw significant selloffs in the equity markets.[iv]

Price Evolution (Jan ’19 – Jan ’23)

Source: Mergermarket (Transactions completed date between Jan 2019 to Jul 2023, within the Industrials sector, disclosed Mergermarket deal value of >€100m, subsequent disclosed Mergermarket enterprise values of >€100m)

Many Industrial companies bolster their competitiveness by integrating robust technological components and systems into their operations, particularly automation, that fuel operational efficiency and scalability. For example, ABB is using robotics to automate its assembly lines and using robots to assemble complex products, such as power transformers,[v] whilst Honeywell is using data analytics to optimize its supply chain.[vi] In our view, the relative stability of Industrial company valuations show that the sector is less susceptible to the volatility and rebounds often observed in the technology sector, whilst benefiting from the efficiencies provided by incorporating technology into their business models.

Recent interest rate rises have driven up the cost of debt to between 75-100% higher making it more challenging for private equity firms to pay a premium for acquisition targets and still achieve their required returns. Negative projections for economic growth can make investment cases less attractive and lead private equity firms to reduce valuations or be more cautious in their investment policy.

Base Rates (Jan ‘22 – Jul ‘23)

Source: Bloomberg, SONIA, EURIBOR and LIBOR rates between Jan 22 and Jul 23

The time to acquire Industrial assets is now

The sector has proved to be resilient and stable since the pandemic and companies with international operations have been particularly successful. They can demonstrate the capacity to pass on inflationary pressures through pricing strategies, allowing them to maintain profitability despite the challenges posed by market-wide cost rises.

For strategic buyers seeking geographic expansion or product line additions, there are many opportunities to acquire high-quality Industrial assets in the market. The key for growth-minded companies is to be prepared and act swiftly and efficiently - speed and readiness were factors that often gave financial buyers the upper hand in the previous acquisition cycle, and we expect this trend to continue.

As Industrials companies have shown resilient valuation levels, there is ample opportunity for private equity firms to exit companies in their portfolios.

In a market where the presence of private equity buyers may be less certain, the ability of both corporate and private equity sellers to tap into the pool of relevant trade buyers worldwide becomes crucial. Partnering with an M&A advisor with extensive insights and connections with strategic buyers globally, can allow clients to navigate the changing landscape and provide an edge over the competition.

Japanese corporates embrace the return of the ‘non-process process'

Some potential sellers are nervous about embarking on a full process with the current lower levels of certainty in the M&A market. However, current market conditions present an opportunity to proactively engage with some strategic purchasers outside or ahead of the formal process and this can lead to a pre-emptive deal on a bilateral basis. This trend resembles the dynamics we observed in 2015 to 2016 when M&A bankers coined the term ’non-process process’ to describe this type of approach and can lead to a very successful outcome without the risk of the perception of a failed process.

On reflection of the behavior observed from 2015 to 2016, we are once again noting many of our Western sell-side clients engaging in discussions with top-tier Japanese strategic investors. The aim is to proactively initiate early engagement for asset sales. Our approach is to build successful relationships with potential buyers before commencing a formal process; however, should a Japanese buyer prove successful, we could bypass the formal process altogether.

Western trade buyers, who are familiar with common M&A procedures, can make an initial go/no-go decision based on high-level information and subsequently work through the details ('quick, quick, slow').

On the other hand, Japanese buyers often require time to internally align their large stakeholder universe. Their strategic assessments, which are typically long-term, product and operational-fit oriented, are driven by compelling business logic ahead of financial imperatives. Nonetheless, they are fully equipped to transact within a Western timeframe once internal consensus is achieved ('slow, slow, quick'). Moreover, their long-term perspective often enables them to offer the winning price, thus becoming bidders of the highest commitment and integrity.

The challenges for the sell-side deal team and advisors involve managing the Japanese bidders' desire to conduct extensive detailed analysis, and deciphering their typically opaque, and sometimes idiosyncratic, decision-making process.

In conclusion - key takeaways:

  1. Preparation is key: This should be the mantra for both sellers and investors in the current climate. Diligent preparation on the sell-side involves the preparation of a robust and realistic business plan, conducting thorough market research, understanding the specific needs and strategies of potential partners, and developing a comprehensive strategy for presenting investment opportunities
  2. Adopt a ‘non-process process’ mentality: Instead of relying solely on formal transactional processes, buyers should focus on cultivating authentic relationships and open communication channels. Initiate private discussions outside or ahead of the formal process to avoid the risk of a potential failed process
  3. Embrace the ‘right’ process and focus on value creation: In a market where the appetite of private equity buyers is uncertain, the ability to tap into the pool of relevant trade buyers becomes crucial 

To discuss any of the themes explored, get in touch with the global Industrials and Asia Access teams here >


This article has been prepared solely for information purposes and is not intended to function as a “research report.” In particular, this means that it is not intended, nor does it contain sufficient information, to make a recommendation as to the advisability of investment in, or the value of, any security.   

Additionally, this article does not constitute or form part of, and should not be construed as, an offer to sell, or a solicitation of any offer to buy, or any recommendation with respect to, any securities. You should not base any investment decision on this article; any investment involves risks, including the risk of loss, and you should not invest without speaking to a financial advisor. 

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[i] Mergermarket data, remaining percentage includes other non-strategic or private equity purchasers

[ii] Mergermarket data, remaining percentage includes other non-strategic or private equity purchasers