The global industrial products (IP) industry experienced an increase in the number of mega deals (value of $1 billion or more) in the first quarter of 2012, despite an overall decrease in the volume of deals (valued at $50 million or more) compared to the fourth quarter of 2011, according to a series of quarterly merger & acquisition reports by PwC that examined activity in the first quarter of 2012 across six sectors: aerospace & defense (A&D), chemicals, engineering & construction, industrial manufacturing, metals and transportation & logistics. Despite improved balance sheets and liquidity across several sectors, the constrained outlook and continued uncertainty regarding the world economy continued to dampen overall M&A activity.
Strategic investors continued to lead activity across the IP industry, but financial investors increased their activity levels in the first quarter of 2012. Across all IP sectors, 26.2 percent of deals that were worth more than $50 million involved financial investors in the first quarter, a slight increase from 23.1 percent of such deals in the fourth quarter of 2011. “While the increased participation of financial investors represents a healthy sign for potential valuation appreciation, we believe strategic investors will continue to drive transaction volume given lack of economic visibility,” said Bob McCutcheon, U.S. industrial products industry leader at PwC.
The total number of mega deals across the combined six sectors increased to 22 during the first quarter of 2012, almost double the 12 mega deals completed in the fourth quarter of 2011. This led to an increase in total deal value among deals worth more than $50 million during the first quarter of 2012 to $80.8 billion, as compared to just under $59.5 billion in the previous quarter. The increase in total value occurred even though the overall volume of deals exceeding $50 million decreased to 153 in the first quarter, from 168 in the fourth quarter of 2011.
Deal value and mega deal activity increased in the industrial manufacturing, metals and transportation and logistics sectors. For deals worth more than $50 million, deal value in the industrial manufacturing sector surged to $15.7 billion in the first quarter, from $11.3 billion in the previous quarter. In the metals industry, the total value of deals (worth more than $50 million) increased to $18 billion in the first quarter, from $15 billion in the fourth quarter of 2011. In addition, deal value worth more than $50 million in the transportation and logistics segment rose to $22.6 billion in the first quarter, from $13.6 billion in the previous quarter. In all three sectors, the number of deals worth more than $50 million decreased sequentially, highlighting the role of mega deal activity in driving total value.
“Overall M&A activity moderated during the first quarter given persistent uncertainty regarding the global economy and an ongoing emphasis to maximize profitability and conserve cash,” said Mr. McCutcheon. “Issues such as concerns over the sovereign debt crisis in Europe and the breadth of the U.S. recovery continue to weigh on the market. On a positive note, total transaction value grew sequentially during the quarter given the resurgence of mega deals across multiple sectors. Bolstered by strong balance sheets and attractive valuations among targets, the uptick in larger transactions was primarily driven by strategic investors who tapped into their cash resources to pursue selective opportunities. Looking ahead, companies that are benefiting from privatization and the infrastructure build-out in emerging markets remain appealing targets, particularly in Latin America and Asia. Given the ongoing focus to expand globally, as well as ample liquidity, we expect strategic players to continue to pursue a prudent approach to M&A in the year ahead.”
According to PwC’s reports, the Asia and Oceana region remained the most active for deals during the first quarter of 2011, accounting for 46 percent of the total number of deals exceeding $50 million or more across all sectors. This included deals where at least one party was from the region. Europe and North America were the second and third most active regions.
“The industrial manufacturing sector represented a bright spot for M&A activity among U.S. companies during the first quarter,” Mr. McCutcheon added. “Reversing the recent trend, the U.S. was the most active country in terms of both the volume and value of industrial manufacturing deals during the quarter. The upswing reflects the overall strength and improved outlook for the U.S. economy, in line with the increased sentiment recorded in PwC’s first quarter Barometer report. Notwithstanding prevailing caution, we expect M&A activity across the U.S. industrial manufacturing sector to remain healthy in the coming months, supported by an improving business climate and ample cash among industry leaders.”
Despite the needs to expand globally to secure new growth opportunities, the pace of local deals continued to represent the majority of transactions during the first quarter, reflecting the cautious outlook. The pace of local deals worth more than $50 million increased to 66.7 percent of deals in the first quarter of 2012 compared to 65.7 percent of deals in the fourth quarter of 2011. At the same time, cross-border deals (worth more than $50 million) decreased slightly to 33.3 percent in the first quarter.
A breakdown of PwC’s analysis of M&A activity and outlook for IP follows:
Aerospace & Defense – After a robust 2011, the A&D sector experienced a decline in deal activity in the first quarter. Cybersecurity, unmanned systems and other defense areas accounted for multiple transactions, and U.S. entities continued to drive larger deals, while non-U.S. companies drove a greater share of smaller and undisclosed deals. Foreign A&D demand is attracting new sector constituents in emerging markets and consequently transactions, particularly at the smaller end of the deal value spectrum. Deal activity in the sector should increase throughout 2012. Commercial OEMs will likely remain active due to ample cash positions driven by the record level of aircraft orders. In addition, as aerospace production increases, vertical integration among suppliers may become necessary to ensure that production targets can be met. Investor pressures to divest slower-growth defense businesses are likely to lead to more spin-offs in 2012 as well.