Deal activity in industrial manufacturing and automotive (IM&A) is expected to continue at a stable pace for the remainder of 2023, much as it did during the first half of the year, as buyers and sellers alike find opportunities despite the global macroeconomic environment. Factors such as the war in Ukraine, recession concerns, inflation, energy costs, and interest rates continue to affect businesses and growth projections. This has brought a back-to-basics approach to deal making and an increased level of diligence as parties seek to mitigate risk.
Market challenges are renewing the focus on portfolio and strategic reviews. These assessments are highlighting strategic gaps in technologies and capabilities. Companies are considering acquisitions to fill these gaps, especially in areas such as robotics, automation, artificial intelligence, cybersecurity, and data analytics. Deals are also helping mitigate supply chain uncertainty through nearshoring; address environmental, social and governance (ESG) goals; and drive value creation opportunities.
In the challenging market dynamics, companies are assessing portfolio performance to determine whether to divest non-core assets to fund further strategic and corporate investments. Sellers are looking to optimise portfolios for growth and profitability. Strategic divestitures are being viewed as ways to enhance current capital allocations and to reinvest capital in new segments and subsectors.
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Aerospace & Defence
Automotive
Business services
Engineering and construction
Industrial manufacturing
‘There is pent-up demand for deal activity; however, market challenges and uncertainty, as well as valuations, will result in a stable level of activity in the near term. Focused strategic acquisitions and non-core divestitures will be driving this pace.’
Aerospace & Defence
- The commercial aerospace sector is expected to grow faster than global economic growth as it recovers to pre-pandemic levels by the end of 2023. However, high fuel costs, continued supply chain issues, increased competition for talent, and increasing pressure to deliver ESG initiatives—particularly carbon emission mitigation—are some of the many challenges that could slow this growth.
- From a dealmaking perspective, within commercial aerospace, companies are attempting to combat those challenges through acquisitions and strategic portfolio reviews. Some companies are looking at vertical consolidation along the supply chain to address raw material and component part concerns while also improving margins. Others are looking to acquisitions to close current skill gaps and increase R&D capabilities.
- Although we have not seen a significant impact on M&A from the higher defence spending arising from the ongoing war in Ukraine, the overall stability of longer-term defence budget forecasts may lead to some additional dealmaking. For example, we may see a consolidation of Europe’s relatively fragmented defence base—or, at the very least, a focus on increasing interoperability of platforms. However, the potential for strategic consolidation could be limited due to regulation and national security concerns, especially if non-European buyers are involved.
- More broadly, we expect that continuing priorities such as unmanned, hypersonics, cyber and space may drive further transactions. Private equity (PE) will likely have a sizable role to play in a rebound of M&A activity given the substantial dry powder ready to be deployed once financing difficulties ease. Financial sponsor buyers may be particularly attracted to a string of smaller add-on transactions to a portfolio business aligned with a government budget focus. We are also seeing a trend among corporates towards midsize acquisitions because larger deals may attract greater regulatory scrutiny. We expect multiples to remain at the top end for high-quality assets that produce strong cash flow and recurring, contracted revenues.
Read our key trends for the automotive, business services, engineering and construction, and industrial manufacturing sectors.
Automotive
- Global automotive M&A deal volumes decreased by approximately 4% in the first half of 2023 compared to the second half of 2022. Deal values held up, largely consistent with 2022 levels, although this was primarily due to the proposed US$23bn acquisition of VinFast Auto, a Vietnamese electric vehicle (EV) company, by a Hong Kong–based special purpose acquisition company. Excluding this EV megadeal, deal value was approximately 40% lower in the first half of 2023 compared to the second half of 2022—highlighting the shift to smaller deal sizes, a trend we expect to continue while financing remains challenging.
- The sector’s need for digital, software and electrification development will continue to keep automotive strategy focused on M&A. We expect the trend from the first half of 2023—when macroeconomic factors dampened M&A activity—to follow a similar pattern during the second half of the year, albeit with the potential for improvement if the economic uncertainty clears. In addition, the evolution of the auto industry business model to one in which services play a larger role will lead to potential investments in start-ups and emerging companies from OEMs.
- Dealmakers demonstrated similar discipline in capital distribution in the first half of 2023 as they did in 2022. Macroeconomic factors exerted added pressure on dealmakers to make strategic decisions, given that there was less margin for error. At the same time, dealmakers benefited from a reduction in margin volatility as certain core commodities and logistical costs tempered in early 2023 from higher levels in recent periods.
- Deal volumes will likely remain stable as automotive companies continue to adapt to an electric future on numerous fronts, including investing in EVs and CASE (connected automated shared electric) assets, minimising supply chain disruptions and consolidating their scale through M&A. Companies seeking to accomplish ESG and carbon emissions initiatives, partially forced by tightening regulations and consumer demands, may do this through acquisitions.
Read our key trends for the aerospace & defence, business services, engineering and construction, and industrial manufacturing sectors.
Business services
- M&A opportunities within business services are expected to remain healthy in 2023 despite the broader global macroeconomic and geopolitical environment. M&A activity will likely be highest within select subsectors, such as outsourced services, managed IT, and professional services (i.e., accounting firms, engineering consulting, labour services, etc.), which remain attractive to investors.
- We also expect to see continued interest in the engineering consulting subsector—specifically testing, inspection and certification—because of healthy margins and lower capital expenditure requirements. The testing, inspection and certification subsector, along with other outsourced services, offers companies opportunities to address shortages of skilled labour, which make them attractive business models for investors.
- We expect to see companies employing a roll-up strategy, where previously fragmented and decentralised services at the local and regional levels are consolidated to build scale. PE players are likely to participate in larger-scale roll-ups, as seen through recent M&A activity in the landscape solutions sector.
- Technology services is a subsector where M&A is expected to drive overall activity. Advances to technology such as AI offer potential to open new revenue streams for service businesses. For example, industrial services providers will be able to use the data they collect (e.g., inspection data) for predictive maintenance and/or improved asset management and sale separately as a software solution. This is becoming an integral part of the growth story of many industrial services players.
- We expect a continued emphasis on ESG initiatives. Companies that can demonstrate tangible benefits in support of the overall value proposition or which can provide tactical benefits, such as capabilities to support sustainability reporting, will be appealing to buyers.
Read our key trends for the aerospace & defence, automotive, engineering and construction, and industrial manufacturing sectors.
Engineering and construction
- Engineering and construction (E&C) deal activity slowed in the first half of 2023, largely due to uncertainty in the economy and a challenging financing market. A recovery in E&C M&A activity in the second half of 2023 will likely require improved confidence in the economy and more stable financing.
- Corporate experience is a key factor in influencing positive deal outcomes. Many PE buyers may show greater caution as they weigh the risk of a market contraction in a less familiar sector. This is creating a window for companies with a proven M&A playbook to successfully navigate uncertainty, find attractive M&A opportunities and complete successful deals. With signs of greater stability in the emerging housing market, this opportunity window may be short-lived.
- We expect companies will engage in portfolio reviews and divest non-core assets to raise capital to fund future growth. Investors with ample dry powder will likely find some attractive take-private opportunities, with a number of companies that went public as part of the wave of post-COVID-19 IPOs being possible acquisition targets. Acquisitions aligned with secular construction trends (such as energy efficiency, labour-saving solutions, and engineered materials) will be attractive because they will likely see above-market growth through the cycle.
- Public-sector investments in infrastructure and demand for modernisation will also likely create deal flow across the E&C sector. For example, the US Infrastructure Investment and Jobs Act, the US Inflation Reduction Act, and the European Union’s NextGenerationEU recovery plan all allocate significant funds (through grants, tax credits, incentives and other financing) directed towards further investment in infrastructure and the energy transition, making these more attractive areas for investors.
Read our key trends for the aerospace & defence, automotive, business services and industrial manufacturing sectors.
Industrial manufacturing
- To stay competitive as supply chains, technologies, and consumer and market expectations change, industrial manufacturing businesses must embrace new technologies. Smart-factory technologies offer one solution but require investment, time, and workforce training to implement organically. Acquisitions targeting established companies with data analytics, the industrial Internet of Things, artificial intelligence and machine learning are likely to drive transformative M&A activity through the remainder of 2023.
- We expect companies to continue to engage in portfolio reviews as they seek to divest non-core assets to free up capital and align with strategic objectives. In addition, industrial businesses continue to focus on their ESG footprint as end markets and customers remain focused on ESG initiatives, especially those which relate to climate. In addition, we expect post-deal activities to be more strategic and transformational than in the past as buyers seek to maximise the value creation potential of the acquired entities—both in the short term and over the longer term.
- Activity in Asia, specifically China, will continue to focus on renewable energy related manufacturing as large conglomerates are expanding into the subsector. Outbound M&A activity recovered rapidly in early 2023, and state-owned companies are becoming more active in the market. These trends offset the lower levels of China-inbound activity, specifically from US funds, which remain hesitant. US investors are showing greater interest in opportunities within the European market, which has seen a slowdown in intra-Europe M&A activity.
Read our key trends for the aerospace & defence, automotive, business services, engineering and construction.
‘There is a strong appetite by corporates with strong balance sheets to acquire strategic capabilities and transform their operational and tech footprint. ESG is also becoming a critical value creation lever for industrial manufacturing companies, especially in Europe.’
2023 mid-year M&A outlook for industrial manufacturing and automotive
Deal activity in the near term is expected to remain at the current pace, with activity expected to grow as certainty increases in global markets, especially in the mid market area. This activity level will likely come from a mix of acquisitions to fill in strategic gaps in technology and capabilities, divestitures to maximise capital allocation, and some larger more transformative transactions.
Business services transactions and tech-driven deals are expected to continue to drive relatively high multiples and crowded auctions. A continuation of difficult financing conditions may dampen the appetite of PEs for large transactions in the second half of 2023, and big IPOs are not expected to win the confidence of public market investors. Furthermore, geopolitical tensions, particularly with China, may affect some inbound and outbound opportunities in the industrial sectors.
Prepared CEOs, with a well-thought-through M&A strategy, will be best positioned to take advantage of deal opportunities and to create value and sustained outcomes as the market rebounds.
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Global Industrial Manufacturing & Automotive Deals Leader, Partner, PwC United States
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