The beat goes on: M&A trends in manufacturing

The Industrial Manufacturing (IM) sector continued to experience less than robust merger and acquisition (M&A) activity in Q3’23 thanks largely to recession fears, cost of capital, geopolitical instability, and supply chain fragility. However, there are several reasons for cautious optimism. Advanced technology is propelling transformation in the key IM subsectors – aerospace and defense (A&D); automotive; engineering, infrastructure and construction; and transportation, logistics and distribution – as companies redefine themselves as “smart” industrial manufacturers. And if inflation keeps declining, interest rates flatten, and access to credit eases up, the hope is that the economy will begin to run on all cylinders, setting the stage for a surge in IM M&A activity in 2024.

Our recommendations remain consistent with the emphasis on three current themes:

• Deal discipline: We hear an emphasis on deal discipline from many of our clients. For sellers, expect even more fundamental diligence on the details of historical and projected business. No stone seems to remain unturned.
• Continue to tune the portfolio: Companies that actively participate in the deal market, both buying and selling, generally outperform those that only buy or rarely transact. Good assets are still heavily competed. Gain focus by divesting non-core assets without trying to time the market.
• Transformative deals: Shifting technologies and capabilities are driving many of the largest deals—both acquisitions of disruptive businesses or new capabilities and divesting or spinning legacy technologies to fund growth. Those deals are generally being rewarded by the market.

Although M&A activity in the IM sector may require a few more quarters to gather momentum, the combination of pent-up demand for deals, significant “dry powder” held by potential acquirers, the adoption of innovative technologies, and strategic repositioning are poised to drive increased M&A activity in 2024. But for now, both corporate and PE buyers are emphasizing rigor and discipline in the diligence process, testing of a wide range of scenarios, and looking to avoid both missed opportunities and overzealous pursuits.

For a comprehensive analysis of the M&A landscape in IM and how to take advantage of investment opportunities, download our paper.