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In 2023, though not the largest year for industrial deals, US bankers have orchestrated over $200 billion in transactions involving industrial companies, reflecting a surge in smaller deals. Despite a $70 billion dip from 2022, the pace remains heightened with more than 4,000 transactions involving US industrial firms. Industrial giants like TransDigm, Ametek, and Fortive engage in strategic acquisitions, emphasising the pursuit of durable growth amid evolving macroeconomic challenges. Private equity’s pace lags, signalling a potential advantage for strategic acquirers as they navigate a shifting industrial landscape.
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Industrial M&A Flourishes Quietly in Search for Value: Brooke Sutherland
By Brooke Sutherland
It’s not the biggest year for industrial dealmaking, but it’s turning into one of the busiest.
So far in 2023, bankers have put together more than $200 billion worth of transactions that involve at least one US industrial company, according to data compiled by Bloomberg. That’s down about $70 billion from the volume at the same point in 2022 and less than half of the $537 billion of activity for all of 2021, which included a pair of $30 billion deals for the railroad Kansas City Southern and General Electric Co.’s aircraft leasing business. There’s a relative lack of blockbuster purchases this year to push up the headline total, but this masks a flurry of smaller deals. With a month and a half to go, US industrial companies have been involved in more than 4,000 transactions. While the pace of dealmaking was more elevated in 2021 and 2022, that compares with an average annual count of about 2,800 over the past two decades.
Just in the past month, during the industrial earnings season, TransDigm Group Inc. agreed to buy an aerospace and defense electronic components business for $1.4 billion; Ametek Inc. announced a $1.9 billion takeover of surgical instruments company Paragon Medical and a separate purchase of Amplifier Research Corp., a manufacturer of radio frequency and electromagnetic compatibility testing equipment; Hubbell Inc. signed a $1.1 billion deal to buy electrical equipment manufacturer Systems Control; and Fortive Corp. agreed to buy EA Elektro-Automatik Holding GmbH — a German supplier of battery testing products, electronic loads and rack systems — for $1.45 billion. Amphenol Corp., Dover Corp. and Idex Corp. have also announced smaller, bolt-on deals worth hundreds of millions of dollars apiece rather than billions.
“Better is an interesting word. It’s not better in the sense that the floodgates have opened or there’s a demonstrative difference between a year ago and today. What you see is unique situations,” Fortive Chief Executive Officer Jim Lico said of the industrial M&A environment in an interview last week. The company prioritizes durable growth opportunities where it has a “proprietary view of how to add value,” Lico said. The opportunity to capitalize on booming demand for enhanced productivity and technologies that will power the energy transition has been the driving force behind much of the industrial M&A activity this year, and Fortive is never going to be the only buyer at the table for an asset that fits into those trends. But it puts the time in to cultivate such targets so that when the right moment comes, it might be the right buyer.
In the case of EA, Fortive got to know the business well over many years; the companies would have booths at the same trade shows, and power market customers would buy test and measurement products from each one. Initial discussions about partnership opportunities evolved to include a possible takeover. Emerson Electric Co. last month closed on its $8.2 billion acquisition of test and measurement company National Instruments Corp., an asset that Fortive was reportedly interested in as well. Big deals like that tend to “bring people looking to sell into the thought process,” Lico said.
The purchase price works out to a mid-teens multiple of EA’s expected earnings before interest, taxes, depreciation and amortization in 2024 — a reasonable valuation for a high-margin and fast-growing business, especially compared with the expensive software deals Fortive did in 2021, according to Barclays Plc analyst Julian Mitchell. Conversations between industrial buyers and sellers now have “a bit more realism,” Lico said. “Despite the fact that we’ve had a good year on the M&A front, we’ve walked away from more things than we’ve closed” because of a gap between seller expectations and what Fortive was willing to pay, he said.
Private equity firms might have their own opinions about how to add value to a business, but their disadvantage relative to industrial acquirers with strategic interests is more of a stumbling block when both interest rates and valuations are elevated. Buyout firms have announced just $9 billion worth of takeovers of industrial assets in the US this year, on track for the weakest pace since 2010 amid the financial crisis. KKR & Co.’s acquisition of pump maker Circor International Inc. and protective materials company Chase Corp. alone account for about a third of the total activity.
Industrial companies aren’t immune to the impact of higher financing costs, but their targets tend to generate strong cash flow, which offsets the need to tap the debt markets for the full purchase price. Fortive, for example, will finance the EA acquisition with available cash (it had more than $700 million as of the third quarter) and debt. While some of the shine has come off industrial stock prices after Labor Day as companies grapple with an inventory glut and weaker demand in certain markets, equity is still a valuable currency — particularly for target companies that believe in the longer-term growth opportunities of their business. Sprawl, that enemy of activist investors, can also be an asset when it comes to acquisitions. Industrial companies simply have more pieces to move around the game board, and each one is a potential source of financing.
Carrier Global Corp.’s pending €12 billion ($13.2 billion) purchase of heat-pump manufacturer Viessmann Climate Solutions includes a sizable equity component, payable to the Viessmann family. The company is concurrently divesting its fire and security and commercial refrigeration businesses and will use the proceeds to chip away at the debt needed to fund the cash portion of the offer. Emerson used the $14 billion sale of its climate technologies business to pay for the National Instruments deal. Rockwell Automation Inc., meanwhile, has announced a string of bolt-on acquisitions this year, including the purchase of cybersecurity company Verve Industrial Protection and Clearpath Robotics Inc., a maker of factory floor mobile robots. The company used the proceeds from the winding down of its stake in industrial software company PTC Inc. to pay for the deals, saving it a trip to the debt markets, CEO Blake Moret said in an interview. “To be able to do those without taking on any additional interest, I’m happy with the timing,” he said. “Quality assets like this are still scarce and expensive.”
Manufacturing companies’ ability to get value-adding deals over the finish line will become more important as the macroeconomic outlook darkens and growth moderates. On a volume basis, sales for multi-industrial companies flatlined in the third quarter, and some experienced outright declines absent the boost from price increases despite relatively easy comparisons to the period a year earlier. “Some of this is just old-fashioned inventory destocking, some of it is China taking a step down. But more explicitly, we worry that we may be nearing a macro tipping point where the impact of higher prices (demand destruction), higher rates, two separate wars, congressional dysfunction, the auto strike, full government budgets, and a stretched consumer seems to all be colliding at once,” Melius Research analyst Scott Davis wrote in an Oct. 30 note.
A Robert W. Baird & Co. analysis of the past three downturns in the manufacturing economy found that the top quartile of industrial performers during those periods prioritized acquisitions more than the bottom quartile, which tended to devote more funds to capital expenditures and debt repayment, according to a presentation at the firm’s global industrial conference earlier this month. The gold standard for industrials is deals that add recurring revenue with strong pricing power and low capital intensity; this turbocharges free cash flow, which then translates into firepower for yet more deals or shareholder returns. And then the cycle starts over, with the benefits compounding over time. This isn’t easy to do consistently, to put it mildly. Ametek, Idex, Ingersoll Rand Inc. and Roper Technologies Inc. are some of the most respected companies in the craft of M&A compounding, but companies including Parker-Hannifin Corp. and Fortive are also establishing themselves as serial dealmakers.
Fortive has added $2.5 billion of revenue through acquisitions since its spinoff from Danaher Corp. in 2016 and generates 50% more free cash flow from each dollar of sales than it did in 2019. Shares of the company slumped 8% on Oct. 25 after it reported weaker-than-expected third-quarter sales that were dragged down in part by an inventory logjam at the advanced sterilization products business that Fortive acquired in 2019 for $2.7 billion. If Fortive had “gotten more growth from its past M&A deals (notably ASP) we likely would have had a more differentiated result, Davis of Melius Research wrote in a note.
But if growth was a bit of a disappointment, margins and free cash flow for the period were not. “I think the work we’ve done to build a more durable and resilient business model is certainly going to become more evident,” Lico of Fortive said. “Who knows if we’re in a downturn or we’ll have a downturn. Every economic cycle has its own look. Investors are going to sit on the sidelines until they can determine what companies are going to be durable in any environment. We’ve used M&A to build a more durable company.” And now “we need to demonstrate that sort of success in a challenging economy,” he added.
Quote of the Week
“In the end, we cannot have a batch of aircraft letting us down all the time. It will destroy us. We want effective, good planes that might not be as advanced, but in the end what we want is reliability.” — Emirates President Tim Clark
Clark made the comments this week in a meeting with journalists — including Bloomberg News — at the Dubai Air Show. Specifically, Clark said a “defective” Rolls-Royce Holdings Plc engine was holding it back from placing an order for Airbus SE’s A350-1000 widebody aircraft. The Rolls model doesn’t meet Emirates requirements for time on wing, meaning it will need maintenance work sooner than the airline would like, Clark said. Public chiding is a well-worn negotiating tactic for airlines angling for better deals from planemakers; Airbus’ head of sales says the engine is “perfectly fine,” and Bloomberg News reported Emirates is close to a possible smaller deal for a different version of the A350. But Clark’s point is an interesting one as aerospace manufacturers compete to build ever-more sophisticated and climate-friendly models. The risk of pushing jet engines to their technological limits is that reliability issues start to crop up more frequently, as my Bloomberg Opinion colleague Chris Bryant wrote in 2019. Four years later, and the industry is still dealing with myriad “teething problems” on engine technologies. The hot and dusty climate of the Middle East in particular has created durability challenges for all of the top manufacturers. Airlines like fuel savings, but they also like predictable maintenance schedules and engines that do what they’re supposed to.
It wasn’t all bad news for Airbus at the Dubai Air Show. The planemaker reached an accord in principle with Turkish Airlines for a potential blockbuster order of single-aisle and widebody jets, although the companies are still hammering out the final details. Boeing Co. locked in a deal with Emirates for 90 of its 777X model, which is scheduled to enter commercial service in 2025 after numerous delays. The company also won a smaller deal to supply Ethiopian Airlines with both 737 Max and Dreamliner jets. That agreement also marks a reputational victory for Boeing; Ethiopian Airlines was the operator of the second Max jet that crashed in 2019, killing all 157 of its passengers and crew.
Deals, Activists and Corporate Governance
Siemens Energy AG secured a €15 billion ($16.2 billion) financial backstop from the German government, a consortium of banks and its former parent company and largest shareholder Siemens AG. The support will give the company more breathing room to fix a costly quality-control issue with its onshore wind turbines without sabotaging the profitable and growing gas and power network businesses. Siemens’ part in the deal involves the purchase of part of Siemens Energy’s stake in a listed Indian affiliate for about €2 billion and a commitment to cover a €1 billion first-loss tranche for the banks’ loan guarantees. Siemens merged its wind-turbine business with Spain’s Gamesa in 2017 and then transferred its holdings in that business to the separate Siemens Energy spinoff of its gas turbine assets in 2020. Siemens Energy consolidated ownership of the Siemens Gamesa Renewable Energy operations earlier this year in a bid to get a handle on cost inflation and supply-chain disruptions that caused the wind subsidiary to bleed cash and issue profit warnings. But the wind division’s problems have only worsened. Siemens Energy separately this week reported a €4.59 billion loss for the fiscal year ended in September and said the Gamesa subsidiary won’t break even until 2026. As Bloomberg Opinion’s Chris Bryant writes, the saga underscores the suboptimal degree of sprawl that persists at Siemens, the parent company, and suggests shareholders may push for a more permanent separation from its legacy businesses.
General Electric Co. announced the boards for both the spinoff of its Vernova energy assets and the remaining aerospace business. Current GE CEO and Chairman Larry Culp will chair the board at the aerospace business, while former American Airlines Group Inc. CEO Thomas Horton will continue to serve as lead independent director. Stephen Angel, the former CEO of chemical giant Linde Plc and a current GE board member, will be the nonexecutive chairman for GE Vernova. New faces on the GE Vernova board include former American Electric Power Co. CEO Nicholas Akins, current Lockheed Martin Corp. CFO Jesus Malave and former Royal Dutch Shell Plc CFO Jessica Uhl. GE Aerospace will add Thomas Enders, the former CEO of Airbus, and Margaret Billson, the former CEO of BBA Aviation Plc’s global engine services division. The breakup is on track to take place at the beginning of the second quarter of 2024.
Goodyear Tire & Rubber Co. CEO Richard Kramer will step down in 2024 after nearly 14 years at the helm, and the company will divest assets including its chemical business, the Dunlop brand and its off-road equipment tire operations. Goodyear agreed in July to appoint new board members backed by activist investor Elliott Investment Management and to review strategic and operational alternatives. The tire maker is targeting more than $2 billion in gross proceeds from the planned asset sales and also announced a $1 billion cost-cutting plan. The streamlining push — which also includes shedding underperforming products — will double Goodyear’s segment operating margin to 10% by the end of 2025, the company said. Goodyear is assessing both internal and external candidates to replace Kramer.
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