First, 2018 industrials…
As illustrated below, in 2018, there were 127 European mid-market* industrial transactions completed. Although this represented a reduction in completed mid-market deals from recent years, both average deal sizes and transaction multiples were higher in 2018 than in 2017.
Overall, European industrial M&A activity in 2018 was characterised by a strong H1, followed by a reduction in volumes in H2 as macro-economic and political issues became more prominent in the minds of acquirers.
So what was driving 2018’s activity? Although there are significant funds in the private equity world looking for investments, the two core drivers for industrial M&A in 2018, were:
- The appetite of international and strategic buyers
- The increasing convergence of manufacturing and technology
*Mid-market is quantified as a deal being valued between €25M – €500M
The appetite of international and strategic buyers
Throughout 2018, international and strategic buyers were a driving force in the industrial M&A market:
- International buyers remain highly active investing into Europe
- 72% of acquisitions were made by strategic buyers
- This was predominantly driven by corporate acquirers having very strong balance sheets, something which should continue to lead to an increased deployment of capital in strategic acquisitions over 2019
- US purchasers (23% of buyers) continued to lead consolidation within Europe. American firepower was partially driven by the continued appreciation of the US Dollar against the Euro and Sterling, as well as confidence in European growth prospects
- Asian purchasers (13% of buyers) were led by Japan, following the tightening of regulations around Chinese outbound M&A
- Within Europe, UK purchasers continued to remain the most active, accounting for 17% of deal volumes. Italian purchasers were the next most active (12%), signalling strong confidence from one of Europe’s industrial heartlands
% of cross-border transactions for FY 2018
% of PE vs. trade transactions for FY 2018
Convergence of technology and manufacturing
Though there has been a lot of M&A activity in the industrial space in 2018, the chart below illustrates the main areas for M&A, as well as the sub-sectors which are seeing an increase and decline in activity.
- Electronics & instrumentation and advanced materials deals continue to be a core driver of M&A in the industrial space, representing over 31% of deal flow combined (up from 21% in aggregate in 2017)
- This activity is driven by increasing demand for technology, illustrated by a desire for connected, lightweight devices
- The automotive sector suffered the greatest decline in 2018, dropping from 19% of total completed deals to 9%, as significant decrease in demand saw confidence drop across the industry
- Activity in aerospace and building products sectors remained strong, whilst proportional increases were seen in oil & gas and flow control, a trend that is expected to continue as moderate growth is forecast in global oil prices for 2019, following renewed volatility during Q4 2018
2018 was also notable for an increasing number of corporate spin-offs as larger groups rationalised their portfolios and also the return of some public-to-private activity, which could increase in 2019 if the stock market correction continues.
Next, 2019 industrials…
2019 outlook: Key trends for industrials M&A
Though many of the 2018 driving factors are prevalent in 2019, there are four key trends that will guide strategic investment decisions and influence M&A in the coming year:
- Industry 4.0
- Increased energy efficiency
- Increased regulation and compliance
Industry 4.0: the convergence of technology and manufacturing
Industry 4.0 is no longer a ‘future trend’ used to stoke interest in a speculative new business line – for many businesses, it is now at the heart of their strategic agendas, and companies are utilising advanced innovation to transform their organisations. The chart below demonstrates the breadth of industry 4.0’s influence on the market, from supply chain to smart sensors and cloud computing.
Industry 4.0 framework
Due to increased connectivity and automation, there is a convergence between manufacturing and technology. As a result, sensing, analytics and software capabilities are often now a key consideration in M&A strategies for many groups.
This rising demand for connectivity has also led to industrial leaders digitising essential functions within their value chains and enhancing product portfolios through the use of sensors and connected devices. This produces huge amounts of data that can be used to improve existing services with digital functionality or introduce new, innovative data-based services. Data analytics now has a key role in facility and plant condition monitoring, for example, maintenance that can be managed on an accurate, predictive basis, rather than reactively.
At the end of this transformation process, successful industrial companies will have pivoted to a new business model, with physical products still at the core, but increasingly augmented by digital interfaces and data-based analytical services.
Bringing tailored automation IP in-house
Bringing tailored automation IP in-house will continue to be a key driver of global strategies in 2019, which we anticipate will drive M&A activity over the year. We are increasingly seeing larger corporates responding to this trend.
A good illustration is Halma’s acquisition of Navtech Radar:
Typically, it is more agile and entrepreneurial mid-market businesses who lead innovation. Subsequently, they are often acquired by larger strategics who have the global platform and routes to market to leverage the technology. By way of illustration, despite its ongoing focus on developing automation solutions in-house, Honeywell acquired Transnorm and instantly became one of Europe’s top suppliers of warehouse automation software and advanced robotic logistics.
This trend of mid-market R&D led businesses being acquired by larger industrial companies is set to continue in 2019 – where companies looking to bolster innovation portfolios will drive continued industrial M&A.
2. Increased regulation and compliance: a safer world to live in
With a growing use of new technology in manufacturing (e.g. automated production lines for metal processing), employers and end users want to ensure that their facilities, processes and products are as safe as possible. In recent years, there has been a significant increase in mandatory safety, maintenance and repair activities to implement these high safety and environmental standards. Manufacturers and operators are often compelled to ensure rigorous ongoing quality control and testing processes, which is often underpinned by increasingly stringent and shorter regulation cycles.
Expansive European manufacturers are capturing new export markets as regulation is being increasingly implemented worldwide, especially in Western economies where compliance is significantly higher.
The safety product market remains extremely fragmented behind a small number of large consolidators (Honeywell, 3M, MSA). There is also a number of private equity groups that are looking to roll up smaller businesses into their platform safety groups, for example, The Smithfield Group’s acquisition of Pure Safety and subsequent bolt-ons in the fall protection sector.
3. Energy efficiency: the driver for carbon neutrality
Alongside aspects of regulation and compliance, businesses are under pressure to monitor their energy consumption. Despite rising energy prices, energy usage is predicted to grow by c.15% from 2018 to 2040 as the global population continues to swell. Energy cost management is therefore becoming equally as important for business owners as it is for end consumers.
The recently ratified Paris Agreement means the ambitious ‘Zero-Carbon’ economy targets (set to be achieved by 2050) are starting to gain traction. Manufacturers will be forced to increase the eco-aspects of their products as government regulations and a growing vocal consumer conscience affect buying habits and costs.
Much of this can be improved through greater penetration of existing technologies (e.g. switching to lightweight materials, installing LED lighting or embracing integrated smart meters) as the potential economic benefits to both manufacturers and consumers begin to be understood more widely. This has been seen keenly in the HVAC sector, with a small number of companies, such as Volution, leading consolidation in the ‘mechanical ventilation with heat recovery’ space.
We believe the quest for increased energy efficiency will continue to underpin M&A in 2019 and beyond.
4. Macro-economic instability: Brexit
Brexit: issues and opportunities
Despite the uncertainty that Brexit brings, the UK industrial sector is generally well positioned for the Brexit fallout. Britain has built up a skilled and flexible workforce, with top universities that are happy to link up with industry. When combining this with the UK’s strong history of engineering and design, the UK’s industrial businesses manufacture quality and innovative products that will continue to be required on a global basis.
In addition, many of the strongest UK industrial groups:
- Sell their products into end markets that are not fundamentally impacted by Brexit;
- Manufacture products in the UK which are exported into international markets and would benefit from a further devaluation of Sterling; and
- Have international operations that can increase their flexibility.
It is too soon to give a definitive answer on the full ramifications of Brexit particularly in light of the recent parliamentary votes, but there are a number of issues and opportunities to consider for UK businesses, or for those looking to invest in the UK, as demonstrated in the above infographic.
The four key trends highlighted are not the only influences on the direction of strategic investment in 2019. Given wider economic uncertainty, there will be a premium for resilience throughout the year, with potential purchasers applying greater scrutiny to the robustness of a target’s bottom line. Whilst the bar may be higher for acquisitions, particularly in the UK in the early part of the year, we are still confident in the M&A outlook for the year as other key fundamentals remain in place:
- Corporate investors with strong balance sheets are using M&A as a key tool for growth;
- Significant private equity ‘dry powder’ requires deployment; and
- Portfolio reshaping by corporates is leading to divestments and spin offs.