One sign the Industrial Manufacturing sector has returned from the worst of the pandemic? Deal activity.
A recent PwC report looking at deals over the past year found a strong uptick in industrial manufacturing mergers and acquisitions (M&A) activity. Specifically, deal value increased by 50 percent in 2021 over 2020, while deal volume remained stable for the full year. However, when breaking it down, deal volume in the second half of 2021 clearly outpaced the first half, indicating a building appetite for investment.
Mega-deals, or transactions exceeding $1 billion in deal value, increased over the same period, as investors accessed sufficient capital to scale their technology-driven ventures and valuations remain frothy.
While pent-up demand from the pandemic that is playing out may mean we won’t reach as much deal value or volume in the future, the impact of the supply chain crisis, pending policy changes, and the amount of available capital means M&A will continue at a brisk pace well into the new year.
The Supply Chain
One of the macro effects of the pandemic is disruption to the supply chain. This continues to be felt around the world and across sectors, especially this holiday season. Industrial manufacturing companies dealing with the impact are looking to protect themselves and manage the risk of future supply chain disruptions.
This risk management is bringing deals and investment onshore — which is likely to continue for the short to medium term as the kinks continue to get worked out of the system. Investment in digital supply chain solutions are also intended to mitigate future disruptions, as companies spend money now to prevent losses down the line. Expect continued investment into the new year, as supply chain issues continue to cause delays.
While some of the deal activity in 2021 stemmed from pent-up demand, 2022 may see a rush of deal activity for another reason: it’s an election year. Uncertainty of the political climate after November 2022 may drive executives to push to finalize deals before changes occur — or potentially pause deals hoping for a change in regime post-election.
Another looming threat is a possible change in tax policy from the election. Once again, executives may want to complete M&A before facing any additional taxes. Many are also hoping to sell before facing higher taxes, adding another, more personal reason to drive deal volume going into 2022.
Plenty of Capital
Finally, the sheer availability of capital means we’ll continue to see plenty of industrial manufacturing M&A in 2022. Private equity firms and corporations alike have significant committed capital, even before factoring in the influence from the SPAC market. In fact, six of the top deals in 2021 were acquisitions made by a SPAC.
SPACs give less established and more experimental companies access to capital they need to scale and take the company to the next level. Expect growth areas like EV-charging infrastructure to continue to be the focus of this investment.
Separations and Divestitures
COVID drove home the necessity of agility, forcing large conglomerates to evaluate their portfolios, assess how to increase flexibility and consider divesting non core assets. We’ve started to see the spinning off assets into multiple organizations, allowing these companies to focus more narrowly on the industries they excel in, rather than serving too many masters at once. The divestitures of non core assets are expected to feed the pipeline well into 2022.
The pace of deals may get closer to ‘normal’ levels in 2022 — but it’s likely to be later in the year. Ongoing supply chain issues, the 2022 election, and committed capital mean the industrial manufacturing industry deal momentum will continue to roar as we head into 2022.
Michelle Ritchie is Industrial Products Deals Partner at PwC, where she specializes in advising clients on their acquisition and divestiture activities. Ritchie has worked exclusively on transactions for almost 17 years and has significant experience leading large, multinational transaction teams. She works with both private equity and corporate clients in both the US and Europe, having worked in San Jose, California, Washington DC and London.