Industrial manufacturing closed out a big year for merger and acquisition (M&A) activity, according to Assembling Value, a quarterly report by PwC US.
There were a total of 213 industrial manufacturing deals (worth more than $50m) in 2014 and the total value soared to $127bn, an increase of 163% over the 2013 value of $48.3bn from 148 deals.
Last year’s M&A activity also surpassed the previous 10-year high of $92.4bn set in 2006.
Deal value and volume remained strong in the fourth quarter of 2014, recording 56 deals worth $24.1bn compared to 38 deals totaling $9.6bn in the same period the previous year. Megadeals worth more than $1 billion were also in abundance in 2014 with 24 announced transactions worth $91.6bn.
“The strong momentum for manufacturing deals in 2014 carried into the fourth quarter as horizontal consolidation and divestitures of non-core business continued to drive robust activity,” said Bobby Bono, US industrial manufacturing leader for PwC.
“Companies are monetising non-core or underperforming assets, leveraging scale in core businesses and considering joint ventures and new strategic alliances to expand into long-term attractive markets, particularly in developing economies with a growing middle class. In addition, management’s attention has shifted away from headcount reduction and cost-cutting programs toward growth initiatives and filling the talent gaps.”
Manufacturers continue to struggle to find and retain talented workforce and a skilled labor portfolio is becoming a more important factor in evaluating potential M&A targets. Almost two-thirds (64%) of respondents to PwC’s Q4 Manufacturing Barometer cited a need to fill skill gaps in their businesses over the next 12-24 months and over the past year, two-thirds also reported having open positions that they were unable to fill with experienced or skilled employees. In order to begin filling the gap, 78& of respondents plan to hire new skill function employees over the next 12-24 months with the broadest needs in engineering/design (62%), manufacturing (44%) and R&D (28%).
The influence of China
Regionally, acquirers from Asia led the way in terms of volume in 2014, accounting for 107 of the 213 deals; however, inbound activity in the region remained subdued. China was the most active acquirer nation, accounting for 35% of all deals during the year. While emerging market activity boomed in the fourth quarter, local market deals remained dominant and no cross-border activity was generated from Asia. Europe, on the other hand, saw a significant amount of local, inbound and outbound activity despite continued economic malaise in the region. Local and foreign buyers continue to scour the region for high quality businesses as they look to align their business portfolio with long-term attractive markets.
“China-involved deals in 2014 exceeded any year of the past 10; however, foreign buyers have become increasingly wary due to an oversupply of capacity, materials and debt in the region and local market consolidation. Given a perceived lack of innovation, inability to move up the value chain and cooling domestic markets, we expect Asian manufacturing companies to begin looking for opportunities in established markets in 2015,” said Bono.
According to PwC, strategic as well as financial investors continued to pursue high-quality industrial assets and were more willing to acquire companies with stable growth prospects, even at a higher valuation. In the fourth quarter of 2014, financial investors accounted for 36% of all deals.
“We expect market expansion, access to next wave technologies, and the compelling need to generate synergies to drive manufacturing M&A activity, particularly in established markets. The potential impact of the first round of regulatory tightening on U.S. economic activity along with the talent crunch will be key areas of focus for management but companies with healthy balance sheets and favorable access to financing will have a clear opportunity in 2015,” Bono concluded.
PwC’s industrial manufacturing M&A analysis is a quarterly report of announced global transactions with value greater than $50 million analyzed by PwC using transaction data from Thomson Reuters.