Global industrial M&A activity maintained a strong pace in 2Q15 despite lackluster transaction volume in the United States and a notable drop off in cross-border activity, according PwC’s quarterly analysis of mergers and acquisitions in the industrial manufacturing industry.
The number of transactions of $50 million or above increased to 66, a slight improvement over the 59 first quarter deals and the fifth quarter in a row to exceed a 50-deal pace. With $28.2 billion in announced deals, 2Q15 totals were well below the near-record $60.4 set in the same quarter of the prior year but easily exceeded the five-year median rate. Almost half the dollar value of transactions was driven by one megadeal, and three transactions of a billion dollars or greater were announced in the quarter.
Global manufacturing activity expanded in the second quarter but at a slower pace than the prior quarter. Domestic growth remains healthy across most end markets, but the strong U.S. dollar and soft overseas demand are sources of concern for U.S.-based exporters, according to PwC’s Manufacturing Barometer survey.
Executives are more risk averse as a result of currency and commodity market volatility and have become more cautious about expansion plans. U.S. transaction activity has been hampered by an obscured growth outlook and associated difficulty determining fair pricing on M&A targets.
U.S. share of global activity dropped to among its lowest levels in a decade and the share of global deals involving energy related entities dropped below 15 percent in the first half of 2015 (versus 23.8 percent in 2014). Sustained low oil price has adversely impacted all players along the oil field and energy sector’s equipment manufacturing supply chain.
Production figures in Europe signal a reasonable pace of recovery even as uncertainty looms regarding the future of Greece and the European Union. Strong exports led by weak currency and increasing domestic spending stemming from low oil price bode well for the region. Transaction activity was limited in the second quarter.
Emerging markets accounted for almost two-thirds of all deals, well above their typical share. As PwC has noted in prior reports, heavy transaction activity in China was driven partially by the need to eliminate excess capacity in the region as the baseline growth rates slows. The economic outlook in the region appears to be worsening with PMI levels persisting below 50. Policy makers continue to cut rates in an effort to spur growth, offset weak capital markets, and stimulate subdued commodity prices. However, manufacturing employment continues to deteriorate and consolidation remains the dominant theme.
Cross-border deals dropped to 16.7 percent of the global total, the lowest share in at least 10 years. However, going forward, the strong dollar could drive U.S. outbound deals in the coming months (since foreign targets have become cheaper in U.S. currency).
Strategic activity in the second quarter covered a diverse range of end markets. PwC sees a continued emphasis among industrial manufacturers on portfolio enhancement and strategic realignment. Companies are cautious about growth, keeping an eye on economies of scale and operating efficiencies in core businesses. Financial investors continue to pursue high quality industrial assets with stable growth prospects, particularly in recovering markets.
PwC analysts are monitoring several additional trends expected to affect the value and volume of deals in the global industrial manufacturing sector:
- Activist investors: There has been a heightened level of activity from the activist investor community.
- Shedding non-core businesses: Restructuring of businesses by aligning business portfolios to high-growth areas in areas of core competencies.
- Financial buyers: With plenty of cash at their disposal, investor groups have been highly active in deals involving diverse end markets.
- Next wave technology: Investing in advances in automation, efficiency and machine communication, as well as next generation robotics and nanotechnology, or acquiring niche expertise in these areas.
PwC remains optimistic that deal activity in the industrial manufacturing sector will continue at a brisk pace. The biggest challenge for potential buyers is calibrating the long-term growth themes (emerging markets and resource scarcity megatrends) with near-term volatility. Companies are re-evaluating growth opportunities in major markets as they digest both the direct and indirect economic implications of the deterioration in oil prices and consider the potential impact of the first round of regulatory tightening on U.S. economic activity.