Global Industrial Manufacturing M&A Value Increases 70 Percent in Second Quarter of 2011, According to PwC
U.S.-Affiliated Deals Contribute 41 Percent of Total Volume and 66 Percent of Total Value
Strategic Investors Dominate Deal Activity and 100 Percent of Mega Deals
Global Domestic Transactions Lead Deal Activity across All Regions
NEW YORK, August 18, 2011 - Merger and acquisition (M&A) value increased 70 percent in the industrial manufacturing sector during the second quarter of 2011, according to Assembling value, a quarterly analysis of M&A activity in the global industrial manufacturing industry by PwC US. In the second quarter of 2011, there were 46 deals that were worth more than $50 million with a total deal value of $18.6 billion, compared to 33 deals and $9.8 billion in the second quarter of 2010. Average deal value was relatively flat at $400 million in the second quarter of 2011 compared to the prior quarter and up from $300 million in the same period of 2010.
In the first six months of 2011, both deal volume and value were up with 86 deals (worth more than $50 million) and a total value of $35.9 billion, an 83 percent increase in volume and 197 percent increase in value when compared to the 47 deals worth $12.1 billion in the first six months of 2010.
"The maturity of the industry, a fairly high market concentration and favorable deal valuations were factors that drove and will continue to drive deal activity in the industrial manufacturing industry. In the near term, continuous global economic growth, fueled by emerging markets, greater capital availability, and more cash on balance sheets should continue to aid strong deal activity in the industrial manufacturing sector," said Barry Misthal, global industrial manufacturing leader for PwC. "In fact, a recent survey we conducted with executives at large, multinational U.S. industrial manufacturing companies found that while a number of global factors contributed to the uncertainty about the world economy of late, U.S.-based industrial manufacturers continued to grow international sales last quarter and remain bullish on overseas revenues. In spite of the recent market volatility, PwC believes that the outlook for deals in the space is encouraging."
In the second quarter of 2011, U.S.-affiliated transactions dominated M&A activity for deals worth more than $50 million, making up 41 percent of total deal volume and 66 percent of total deal value, with 19 deals with a total deal value of $12.3 billion.
Strategic investors continued to drive deal activity in the second quarter of 2011 with approximately 80 percent involved in deals worth more than $50 million, compared to nearly 20 percent from financial investors. In the first half of 2011, nearly 78 percent of strategic investors were involved in deals worth more than $50 million, already exceeding the involvement of strategic investors for all of 2010 with approximately 76 percent.
"The mature and saturated nature of the industry is driving companies to seek growth opportunities through further consolidations within the industrial manufacturing sector," said Misthal. "Even though financial and credit conditions have improved, financial investors have not yet made a strong return to this sector, and the slowdown that began during the second quarter of the year has negatively impacted financial investors' interest."
According to PwC, mega deal activity, or transactions worth $1 billion or more, was entirely driven by strategic investors in the second quarter of 2011, confirming the strong desire of these companies to realize growth through acquisitions. During the second quarter of 2011, there were three mega deals with a total value of $7.7 billion, compared to three mega deals worth $4.4 billion in the second quarter of 2010.
"Small and undisclosed value deals continued to dominate deal activity in the second quarter of 2011 as strategic and financial investors are approaching prospective transactions with increased caution. Although globalization remains relevant, companies are shifting their focus towards deals that can provide new strategic opportunities and synergistic growth," continued PwC's Misthal. "Going forward, mega deal activity is expected to continue to be restrained by companies and financial investors' conservatism in pursuing large transactions along with the growing uncertainty of the industrial manufacturing sector. However, despite the improving macro-economic conditions, companies are likely to continue to deleverage and invest in smaller, bolt-on acquisitions."
For deals worth $50 million or more, the industrial machinery category was the primary driver of deal activity with 61 percent and one of the three mega deals in the second quarter of 2011. Despite contributing the remaining two mega deals, the number of rubber and plastics products deals decreased during the second quarter of 2011 with 4 deals worth $3.53 billion, compared with 4 deals worth $0.65 billion in the second quarter of 2010. Meanwhile, the number of fabricated metal products deals increased to 20 percent during the second quarter of 2011 from 12 percent in the same period of 2010.
The pace of global domestic market transactions has already exceeded all of 2010, which represented approximately 58 percent of deals worth more than $50 million, compared to nearly 72 percent during the second quarter of 2011 and nearly 61 percent in the first half of 2011. According to PwC, companies are pursuing more local consolidations as growth tools, as both the emerging and some developed markets have already taken steps to restrain unsustainable growth in order to control inflationary pressures.
PwC's Misthal added, "As firms within the emerging markets grow and become financially stronger, they are likely to pursue opportunities within their local economies, since there is less risk in local transactions. Their economies' growth is expected to surpass the growth in the developed world."
Global domestic deals across all regions led deal activity with North America contributing 13 deals and both Asia and Oceania and Europe contributing 10 deals. Interestingly, Asia and Oceania's stake in total transactions decreased both in terms of volume and value during the second quarter of 2011 with 30 percent or 14 deals worth more than $50 million, compared to 41 percent or 11 out of 27 deals during the second quarter of 2010.
"North America and the U.K. and Eurozone are expected to continue to make significant contributions to deal activity as companies within those regions strive to generate growth and greater returns," continued Misthal. "At the same time, due to greater expected growth opportunities and stronger economic recovery, companies in Asian markets, especially in China, are likely to seek consolidation in their own local markets."
BRIC countries also experienced strong deal activity in the second quarter of 2011 with 10 deals worth $50 million or more, and China contributing eight deals worth $2.25 billion. According to PwC, due to the great amount of state-owned assets that are going public or restructuring to leverage public capital in China, transactions in the country are likely to increase as investors seek opportunities for greater returns. India and Russia also present great opportunities for new market entrance to foreign companies.
"Companies need to be aware that incidents of corruption and bribery are of significant concern when doing business in emerging markets such as India, Brazil, Mexico, Russia, Indonesia and Turkey," added Misthal. "In fact, the rate of bribery and corruption in the industrial manufacturing industry has increased sharply in recent years - and with the uptick in deal activities, companies need to mitigate the related risks."
In the latest Assembling value, PwC includes a special report entitled, "Does your company's M&A strategy mitigate corruption-related risk and cost?" that discusses the factors that companies need to consider when pursuing cross-border deals, including vetting third parties, determining the appropriate level of due diligence, and navigating disclosure requirements for certain resources like conflict minerals.
The industrial manufacturing industry has been identified as an area of increased risk for Foreign Corrupt Practices Act (FCPA) violations. Incidents of corruption and bribery often arise in this sector when companies deal with third parties, as suppliers have been known to deliberately substitute inferior materials to reduce costs.
According to PwC's Misthal, "Many industrial manufacturing companies are taking a zero-tolerance approach to bribery and corruption so as not to risk penalties from regulators and potential damage to brand value and share price. In response, companies are prioritizing anticorruption initiatives that mandate effective 'tone at the top' and are sending a consistent message opposing economic crime."
For a copy of Assembling value, PwC's quarterly analysis of M&A activity in the global industrial manufacturing sector, please visit: www.pwc.com/us/industrialproducts
About PwC's Industrial Manufacturing Practice
PwC's Industrial Manufacturing practice comprises a global network of industry professionals strategically located in more than 30 countries around the world. The practice brings experience, international industry best practices, and a wealth of specialized resources to help solve business issues.
About PwC's Industrial Products practice
PwC's Industrial Products (IP) practice provides financial, operational, and strategic services to global organizations across the aerospace & defense (A&D), business services, chemicals, engineering & construction (E&C), forest, paper, & packaging (FPP), industrial manufacturing, metals, and transportation & logistics (T&L) industries. With more than 31,000 professionals located in over 150 countries, PwC's IP global professionals deliver a wide range of industry-focused tax, assurance, and advisory services to address critical business issues. For more information please visit: www.pwc.com/us/en/industrial-products
About the PwC Network
PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information.
© 2011 PwC. All rights reserved. "PwC" and "PwC US" refer to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
# # #
CONTACTS:
Sharon Oh / Jo Anne Barrameda
Brainerd Communicators, Inc.
(212) 986-6667
***
Clare Chachere
PwC US
(512) 867-8737