Mergers in Industrial Manufacturing Sector Up 70pc in Q2 2011
The value of merger and acquisition (M&A) in the industrial manufacturing sector during the second quarter of 2011 has increased by 70 percent, according to Assembling value, a quarterly analysis of M&A activity in the global industrial manufacturing industry by PwC US.
According to the analysis, there were 46 deals that were worth more than $50 million with a total deal value of $18.6 billion in the second quarter of 2011, against the 33 deals and $9.8 billion in the same period last year. On an average, deal value was relatively flat at $400 million in the second quarter of 2011 compared to the prior quarter and up from $300 million in the same period of 2010.
In the first six months of 2011, both deal volume and value were up with 86 deals, or worth more than $50 million, and a total value of $35.9 billion, an 83 percent increase in volume and 197 percent increase in value when compared to the 47 deals worth $12.1 billion in the first six months of 2010.
According to Barry Misthal, global industrial manufacturing leader for PwC, the factors that spurred the deal activity in the industrial manufacturing sector included maturity of the industry, a fairly high market concentration and favorable deal valuations. These factors are also said to continue to drive deal activity in the industry.
“In the near term, continuous global economic growth, fueled by emerging markets, greater capital availability, and more cash on balance sheets should continue to aid strong deal activity in the industrial manufacturing sector,” said Misthal.
Misthal cited a recent survey that PwC conducted with executives at large, showing that while a number of global factors contributed to the uncertainty about the world economy of late, U.S.-based industrial manufacturers continued to grow international sales last quarter and remain bullish on overseas revenues.
“In spite of the recent market volatility, PwC believes that the outlook for deals in the space is encouraging,” Misthal said.
In the second quarter of 2011, U.S.-affiliated transactions ruled deals worth more than $50 million, which constitutes 41 percent of total deal volume and 66 percent of total deal value, with 19 deals with a total deal value of $12.3 billion.
Strategic investors continued to drive deal activity in the second quarter of 2011 with approximately 80 percent involved in deals worth more than $50 million, compared to nearly 20 percent from financial investors. In the first half of 2011, nearly 78 percent of strategic investors were involved in deals worth more than $50 million, already exceeding the involvement of strategic investors for all of 2010 with approximately 76 percent.
On the other hand, PwC said transactions worth $1 billion or more were entirely driven by strategic investors in the second quarter of 2011, “confirming the strong desire of these companies to realize growth through acquisitions.”
During the second quarter of 2011, there were three mega deals with a total value of $7.7 billion, compared to three mega deals worth $4.4 billion in the second quarter of 2010.
“Although globalization remains relevant, companies are shifting their focus towards deals that can provide new strategic opportunities and synergistic growth,” continued Misthal.
“Going forward, mega deal activity is expected to continue to be restrained by companies and financial investors’ conservatism in pursuing large transactions along with the growing uncertainty of the industrial manufacturing sector. However, despite the improving macro-economic conditions, companies are likely to continue to deleverage and invest in smaller, bolt-on acquisitions,” Misthal said.
For deals worth $50 million or more, the industrial machinery category was the primary driver of deal activity with 61 percent and one of the three mega deals in the second quarter of 2011. Despite contributing the remaining two mega deals, the number of rubber and plastics products deals decreased during the second quarter of 2011 with 4 deals worth $3.53 billion, compared with 4 deals worth $0.65 billion in the second quarter of 2010. Meanwhile, the number of fabricated metal products deals increased to 20 percent during the second quarter of 2011 from 12 percent in the same period of 2010.
The pace of global domestic market transactions has already exceeded all of 2010, which represented approximately 58 percent of deals worth more than $50 million, compared to nearly 72 percent during the second quarter of 2011 and nearly 61 percent in the first half of 2011.
According to PwC, companies are pursuing more local consolidations as growth tools, as both the emerging and some developed markets have already taken steps to restrain unsustainable growth in order to control inflationary pressures.
Global domestic deals across all regions led deal activity with North America contributing 13 deals and both Asia and Oceania and Europe contributing 10 deals.
Interestingly, Asia and Oceania’s stake in total transactions decreased both in terms of volume and value during the second quarter of 2011 with 30 percent or 14 deals worth more than $50 million, compared to 41 percent or 11 out of 27 deals during the second quarter of 2010.
BRIC countries also experienced strong deal activity in the second quarter of 2011 with 10 deals worth $50 million or more, and China contributing eight deals worth $2.25 billion.
According to PwC, due to the great amount of state-owned assets that are going public or restructuring to leverage public capital in China, transactions in the country are likely to increase as investors seek opportunities for greater returns. India and Russia also present great opportunities for new market entrance to foreign companies.
“The industrial manufacturing industry has been identified as an area of increased risk for Foreign Corrupt Practices Act (FCPA) violations. Incidents of corruption and bribery often arise in this sector when companies deal with third parties, as suppliers have been known to deliberately substitute inferior materials to reduce costs,” PwC said.