By Michelle Tomchak Ritchie
Scarred by the unprecedented supply chain crisis of the last several years, industrial manufacturing M&A activity in 2023 will consider onshore or nearshore actions for certain operations through facility or supplier acquisitions. This is a trend we are already seeing in global players in the transportation and logistics and consumer markers industries as a result of supply chain disruptions.
Overall, PwC’s Industrial Manufacturing: US Deals 2023 Outlook found that industrial manufacturing M&A deals declined in 2022 from historic levels in 2021. However, the 2022 level of deal activity was still above historical trends, specifically higher than 2019.
Expect a strategic shift
Despite macroeconomic headwinds, the year ended strongly, with significant growth over the previous quarter. This year, however, we expect to see strategic focus areas of investment along with portfolio review to grow deal activity. Companies are looking across their capabilities, in the context of where they stand in the markets, to identify gaps in their portfolios — from skills and service to product offering to price point.
Driven by continued economic uncertainty and geopolitical events, we saw signs of a shift from more transformational deals — transactions exceeding $1 billion in deal value — in North American M&A volume in the second half of 2022.
M&A activity in strategic areas will supplement platforms and programs and may help to minimize supply chain risk, enabling companies to become better positioned to weather macroeconomic challenges. In 2023, companies continue to manage ongoing, albeit easing, shortages and prevent another major disruption, which will also be an influence on the M&A landscape over the next 12 months.
Companies may seek opportunities to combine businesses to reach scale and to limit margin erosion from volatile commodity prices and increasing energy costs. We will likely see vertical integrations to secure access to key suppliers and raw materials, contributing to an accelerating trend of businesses converging into different sectors.
Getting back to basics
Essentially, 2023 will be a year of getting back to basics. Industrial manufacturing companies are retrenching. M&A activity will also likely be driven by mid-market corporations and private equity portfolio companies seeking strategic expansion of platforms and programs.
CEOs are potentially looking to divest non-core assets, which is likely to fuel stable deal activity. Many are reviewing their portfolios and considering carve-outs and divestitures as they shift focus from growth to profitability and capital allocation. These transactions will raise new capital for investment in more profitable areas. Corporates with lower cash balances are likely to consider more defensive M&A strategies.
This might be surprising, considering companies across all industries are typically more reluctant to embrace them than acquisitions. Even though divestitures come with significant investments in costs, time and operational complexities, they are a critical part of strategic repositioning and can help drive higher shareholder returns.
In this case, attitudes matter. We see a correlation between results and a positive attitude, with about two-thirds of sector respondents seeing more than a 5% return on their divestitures.
Four hot areas for M&A
We’ve identified four hot areas for strategic acquisitions: innovative technologies, data analytics, people and cybersecurity. New technology can not only create resilience, but also a competitive advantage in the longer term.
Innovative technology areas include batteries and charging for electric vehicles, cloud, AI and robotics. Data analytics will enable more strategic decisions— including helping manage the high price of input costs such as energy and raw materials along with the right strategy to protect their companies from margin erosion and order volatility.
Sector perspective
The altered trajectories of many industries have brought both challenges and opportunities, but the impact varied significantly among sectors. Recovery continues to be uneven, and convergence is ongoing.
From a sector perspective, a recovery in tourism and stability in defense budgets makes us cautiously optimistic about deal making activities in aerospace and defense (A&D). Transactions in the automotive market will continue to be dominated by the transition to electric vehicles.
The desire for infrastructure investments will drive deals in the engineering and construction (E&C) sector. We also expect a healthy level of transactions in the business services sector due to the sector’s somewhat anti-cyclical nature, combined with growing investor interest in technology-led solutions.
Bringing it back to industrial manufacturing, the sector will likely see a stable level of deals activity, with medium-size transactions driven by strategic focus areas and national consolidation in the machinery and equipment niches.
About the Author:
Michelle Tomchak Ritchie is the Co-Global Industrial Manufacturing and Automotive Deals Leader and US Industrial Products Deals Leader at PwC, focused on advising clients on acquisition and divestiture activities. She supports both private equity and corporate clients in the US and Europe.
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