Weakness in the U.S. economy continues to affect M&A deal activity and value in the industrial products sectors, specifically industrial manufacturing, chemicals, and metals, according to a series of PricewaterhouseCoopers LLP first quarter M&A reports.
While deal activity remains steady, deal volume and value is not on pace to exceed 2007 levels; however, the number of deals announced during the quarter is on track to meet or exceed 2006 levels.
The slowdown in the pace of large deals announced in the first quarter is a direct reflection of the difficult financing environment. Only the transportation &logistics sector is on pace to exceed the level of large deals in both 2006 and 2007. Deal interest for targets in Asia has been particularly strong during the quarter across each subsector. Additionally, the weak U.S. dollar is driving the increased interest in U.S. targets by cross-border acquirers.
Record levels of M&A were reached in 2007 across the various sub-sectors. Given the economic downturn in the U.S. we cannot expect to see similar levels or value this year; however, our Q1 analyses show respectable levels of activity,” said Dean Simone, U.S. industrial products leader at PricewaterhouseCoopers. “This economy offers significant opportunities specifically for those well-capitalized strategic investors who are in the best position to initiate deals.”
Details on each sub-sector M&A report:
Industrial Manufacturing
Deal activity in the global industrial manufacturing sector declined slightly in the first quarter of 2008, according to the inaugural edition of Assembling Value: Global Industrial Manufacturing Mergers &Acquisitions Analysis. A total of 39 deals (disclosed value at or above $50 million) were announced in Q1 2008, down from the 47 announced deals in the first quarter of 2007 but on par with the 38 deals seen in Q1 2006.
Total deal value for industrial manufacturing transactions during the first quarter of this year totaled $7 billion, a significant decline from $13 billion in the first quarter of last year and the $31 billion announced in Q1 2006. The decline in total deal value is related to a slowdown in large deals (disclosed value of at least $1 billion), of which there were none in Q1 2008 compared to 17 announced in 2007 and the 17 in 2006.
Overall, the pace of deals involving U.S. targets declined (12 announced deals) in Q1 2008 as compared to the total deals announced over the past two years (65 deals in 2007 and 51 deals in 2006). However, the proportion of foreign acquisitions of U.S. targets has increased by 33% in number of deals during the first quarter of 2008 as compared to only 22% of deals announced during 2006 and 2007. The relative weakness of the U.S. dollar has likely been a key factor in this change, since it makes acquisitions of U.S. targets more attractive to foreign entities.
Despite the overall decline in deal activity, the pace of deal activity for targets in China has increased with six deals announced during the first quarter compared to nine and 17 in all of 2006 and 2007, respectively. And, of these nine deals, 83% involved acquirers from China, up from 65% in 2007 and 33% in 2006. Globally, three regions accounted for 90% of target companies both in terms of the number of deals and deal value announced during the first quarter of 2008: Asia and Oceania, UK and Eurozone, and North America.
Chemicals
Deal activity in the global chemicals industry is off to a slow start this year with only 154 announced deals totaling $11 billion in deal value, according to the Q1 2008 Chemical Compounds: Global Chemicals Mergers &Acquisitions Analysis. Annualizing the first quarter activity indicates a significant decrease from 2006 and 2007 levels due to a drop in deal volume as well as fewer larger deals (deals valued over $1 billion). This decline was not unexpected given the current turmoil in the credit markets, which has made financing large transactions difficult.
The regional distribution of deals shows a decrease in M&A activity in North America and Western Europe, which were more equally distributed last year, offset by the increase in Asia-Pacific and the Middle East. The high level of activity in both Asia-Pacific and the Middle East, as measured by deal value, was driven by one intra-regional transaction for each region – which happened to be the two largest transactions this quarter. The majority of the announced transactions in Q1 2008 were intra-regional deals (65% by number and 83% by value).
Metals
The pace of deal activity in the global metals industry slowed in the first quarter of 2008 amidst concerns of industry consolidation and a tightened credit market, according to Forging Ahead: Global Mergers and Acquisitions Analysis. A total of 31 deals (disclosed value at or above $50 million) were announced in Q1 2008 accounting for $20.9 billion in total deal value.
The volume of deals is on pace to exceed 2006 levels but lags the number of transactions seen in 2007. The slowdown in total deal value was primarily driven by the absence of deals worth at least $10 billion. Last year, total deal values in the global metals industry totaled $295.5 billion, and in 2006, the total deal value was $186.7 billion.
Consistent with previous quarters, firms in Asia and Oceania served as the leading targets as measured by number of deals, accounting for 42% of all deal targets. However, North American companies also remained attractive acquisition targets, accounting for the greatest total deal value of all regions (42%) and representing the second-highest number of deal targets (26%) in the first quarter of 2008.
The level of interest in North American targets by foreign investors will likely remain strong due to strong metals prices, increased demand, and the weak U.S. dollar which makes cross-border transactions of U.S. targets less expensive.
