- In 2016, there were 942 cross-border deals in the industrials sector, a post-crisis record. Value also hit a post-crisis high of US$116.8bn
- Of the industrial sub-sectors (manufacturing, electronics, industrial products/services, automation, and defense), both products and services and automation saw substantial year-on-year increases
- China was particularly acquisitive in 2016 with three of the top eleven deals involving buyers from the country
- There are four key trends that will drive M&A in 2017, and dealmakers need to be ready for them
Despite a febrile political climate, industrial companies have accepted this new normal and are more confident than ever in their dealmaking abilities. In 2016, the sector broke post-crisis records – volume was up 2.5% year-on-year while value rose 48% compared with 2015. Both China and the US have been extremely acquisitive. The US was involved in the biggest deal of the year, as Johnson Controls bought Ireland’s Tyco International for US$16.2bn.
There are two main factors driving this current wave of M&A in the sector – confidence and opportunity. “The C-suite is still confident and sees the opportunity in new technology, new regions, new platforms and new growth,” says Baker McKenzie partner Dieter Schmitz. “There is also the opportunity where companies see cracks from PE looking to exit and conglomerates looking to do divestitures.”
Given this renewed confidence and the resilience to volatility, the deal market is expected to continue to thrive in 2017, with four specific trends underpinning M&A in the sector – disruption and technological innovation; core competencies and divestments; after-market services; and defense spending.
From automation to robotics and AI, new platforms, models and delivery routes are revolutionizing the sector, and companies need to seize these opportunities now.
“Even the large technology companies need to continue to keep themselves up to date by buying out smaller rivals, who may have a disruptive technology,” says Baker McKenzie partner Munir Abdul Aziz.
This is exemplified by the US$4.3bn transaction which saw Chinese appliance giant Midea take a 95% stake in German robotics company Kuka. Midea hopes that Kuka’s advanced technology can help automate existing systems.
A deal with a similar strategy was announced in March this year, as Japan’s Toyota acquired the Netherlands-based company Vanderlande, which provides automated handling solutions.
“Industrials have a lot to learn from these smaller, more innovative companies – agility, fluency and alacrity,” says Baker McKenzie partner Stephane Davin.
The disruption in the sector is evidenced by the growth of the Internet of Things (IoT). This merging of physical and digital worlds could create up to US$11trn in economic value annually by 2025, according to McKinsey. It is little wonder, then, that traditional industrial conglomerates such as ThyssenKrupp and GE have IoT high on their agenda.
“Technology, and specifically IoT, will drive M&A,” says Baker McKenzie partner Nikolaus Reinhuber. “Industrials have to reshape the way they’ve been doing things, whether they like it or not.”
Back to the core
Industrial groups are also looking inwards. To paraphrase former GE CEO Jack Welch, if the business isn’t number one or two in a given sector, then companies are looking to move on. This return to core competency led to a number of big deals in 2016 and will continue to do so, as groups divest unwanted units and bolt on complementary ones. “Companies need to focus on the thing that they're really good at because there are competitors, large and small, that are trying to become more innovative in what they can offer,“ says Abdul Aziz.
A clear example of this move towards consolidation of core activities came in last year’s third biggest deal, which saw German industrial giants Siemens purchase Spain’s Gamesa for US$7.5bn. The merger will create the world’s largest builder of wind farms.
“Businesses are concentrating on core,” says Davin. “European companies such as Safran and Air Liquide, for example, have focused on core activity in their most recent deals.”
As companies consolidate and divest non-core divisions, this could present opportunities for PE to move into the market. “Non-core divisions often don't get enough attention,” says Reinhuber. “PE can often do a better job at reshaping and growing the business than a conglomerate.”
One PE firm that felt it could do a better job was Sweden’s EQT Partners which picked up Bilfinger, the German engineering group that provides maintenance services for industrial plants, for US$1.6bn in June 2016.
After-market service has become a major distinguishing factor for companies. It can be an excellent revenue driver. Or as Davin puts it: “After-market service and maintenance is where the gold is.”
One recent deals saw all-terrain vehicle manufacturer Polaris buy accessories maker Transamerican Auto Parts for US$665m in an effort to boost its after-sales service. While it may not drive as much activity as disruption, divestments or core consolidation, it is likely to be part of industrials’ strategy in the coming years. “It’s difficult to see how it can drive lots of M&A activity,” says Reinhuber. “An industrial would have to acquire an after-market company and that goes against focusing on core. However, it is a great recurring revenue driver.”
The defense dividend
The final driver for M&A in the industrials sector could be defense. In terms of M&A activity, defense has always been something of the poor relation in the industrial sub-sectors. That could be about to change with the announcement that President Trump is proposing a US$54bn rise in defense spending.
“There are major opportunities in the increased defense spending from a US perspective," says Schmitz. "This is one of the key areas where the government wants to spend money."
While 2016 was an outstanding year for the industrials sector, 2017 could be just as big – and companies need to be primed and ready to take advantage if the opportunity arises. “Companies need a thoughtful M&A prioritization and execution process,” says Schmitz. “Deal certainty beats price – companies can speed up closing by having financing arranged, regulatory hurdles processed, anti-trust sorted, synergies calculated and integration plotted. Sellers want to get the deal done. This could give corporates the advantage over PE. They need to be ready to move quickly.”
However, companies that want to succeed in the deal market will also need to be more aware of changing regulations and public perception. “The M&A market is becoming more complex. Regulation is increasing with a greater focus on national interest," says Reinhuber. "M&A players need better stakeholder management and to handle the public much more thoroughly. This could be the differentiating factor for getting your deal over the line.”