Industrials & Industrial Tech: A New Wave of M&A is Coming

In the wake of the 2008 financial crisis, a wave of M&A transformed advanced industries and the post-2020 wave promises to be larger and more disruptive. Increased vaccination rates and the easing of COVID-19 restrictions in many countries have lifted economic forecasts and improved the outlook of CEOs. 

For businesses and investors alike, the uncertainty that characterized most of 2020 appears to have been replaced with a clearer vision of future demand. With that in mind, many companies have already reassessed their strategies and are looking to M&A to realign their portfolios accordingly to create value. The most successful among them will be those with the financial strength and strategic foresight to take advantage of deal-making opportunities and execute on structured value-creation plans.

Now is the time for a call to action: industrial CEOs need to prepare. This is the moment for them to lean forward, shape the future of the industry, and set the stage for the next curve of innovation, growth, and leadership.

Key themes driving M&A activity:

Increased availability of capital

Greater capital availability is supporting increased M&A activity. Private equity (PE) continues to look for opportunities to invest, capital from family offices has grown, and SPACs have generated some of the largest deals in the industry in the first half of 2021. SPACs typically target assets in hot, tech-enabled segments and are often seen as willing to take on higher risk investments than PE, such as companies which may be loss-making and/or pre-revenue.

Industry convergence between M&A and technology. Technology adoption is by no means a new trend for industrial manufacturing companies, but the challenges posed by COVID-19 accelerated the urgency of transformation. Digitalization gives companies the opportunity to both improve operational efficiency and access new revenue streams. Businesses across sectors are embedding software and sensors into their products and components-elements that facilitate the sale of ongoing maintenance services and data analytics subscriptions. This is blurring the lines between industries.

Supply-chain disruption

As a result of Covid 19 pandemic, supply-chain digitization is increasing, and companies are gaining greater visibility into their supply chains end to end. Industrial companies will be better equipped to understand the concentration of their suppliers and manage risks. Lessons learned during the crisis may also encourage the development of local leading-edge capabilities to ensure that mission-critical parts are available in times of need.

Environmental, social and governance performance in focus

ESG concerns are becoming a standard part of deal discussions, reflecting their anticipated impact on businesses and consequently being factored into strategy and valuations. Particular areas of focus for IM&A include energy use, production process innovations, EV battery and fuel cell adoption, supply chain resiliency, health and safety, cultural issues, and diversity and inclusion. The engineering and construction industry, for example, faces increased regulation around energy-efficiency and growing demand from customers to meet certain ESG standards, as the customers themselves look to measure their own progress on the transition to net zero.

Companies that have weathered the stormy market well and are in a healthy financial position have even seen new market opportunities emerge or strengthen. They have an excellent opportunity to take share and exceed market growth both organically and through well-placed M&A strategies.