Current M&A trends in the industrial machinery and components sector
Dr. Florian von Alten, leader of Oaklins’ industrial machinery & components team, in an interview with FINANCE Magazin
FINANCE Magazin is a leading bi-monthly trade magazine published by the F.A.Z. publishing group on the topics of finance, M&A and capital market. Ms. Sabine Reifenberger, Managing Editor at FINANCE Magazin, interviewed Dr. Florian von Alten, Managing Partner of Oaklins Angermann AG, in January 2021 on current trends in the M&A market for companies in the industrial machinery and components sector.
Florian has made his mark as a professional M&A advisor for 27 years now and has been able to close over 110 transactions during this time. With 850 professionals in 45 countries worldwide in the Oaklins organization, he also looks and acts beyond national borders and gives us his assessment of the M&A activity in this industry segment in the midst of the pandemic below.
S. Reifenberger: How do you assess the industrial machinery and components sector at the moment, how sustainable do you consider the current earnings level and the currently common company valuations?
F. von Alten: The real production volume in the industrial machinery and components sector has fallen by 14% in 2020, mainly due to Corona. This is not quite as much as after the Lehman financial crisis in 2008/2009, but still significant. However, it is noticeable that incoming orders and sales in Q3 2020 - after the 1st lockdown - fortunately recovered very quickly before the growth impulses lost steam again in Q4 due to the rising Corona case numbers. For 2021, experts from the VDMA forecast sales growth of around 4% in the industrial machinery and components sector. This forecast is supported by expectations of the Corona vaccine, the change of government in the USA and the associated hope for a revival of world trade, the EU Recovery Fund, the investment plans in connection with the Green Deal and the positive growth in China. If the second lockdown does not last too long, it can be assumed that industrial growth will pick up again quickly due to these framework conditions - despite the significant increase in government debt. With valuation multiples remaining unchanged, the realized company values are currently slightly below the level of 2019 due to the market uncertainty. Within the machinery & components sector, the valuation multiples in the automation, digitalization, robotics and environmental technology sectors have remained rather stable, while, for example, classic mechanical engineering companies that supply exclusively to the automotive sector (combustion engine construction) have had to realize lower valuation multiples.
S. Reifenberger: From your point of view, how have valuation multiples changed in the mechanical engineering sector over the past three years? What is the trend direction?
F. von Alten: With the exception of the automation (also 3D printing equipment), digitalization, robotics, sensor technology, and environmental technology segments, the EBITDA multiples for traditional mechanical engineering have declined by 1 to 1.5x EBITDA over the past 3 years. The peak was between Q4 2018 and Q2 2019.
S. Reifenberger: What is the current deal activity in this area?
F. von Alten: According to our Oaklins M&A Market Report 2020, there were a total of 178 transactions in the Industrial Machinery & Components sector with German participation until 11 December 2020. In 2019, there were 115 more transactions, so there was a 39% decline. Across all sectors, there was only a 19% drop (from 2,288 to 1,861 reported transactions). Thus, there was an above-average slump compared to other sectors in 2020. Companies in the machinery & components sector were not only directly affected by the lockdown in spring 2020, but also by interrupted supply chains and underutilized capacities at their buyers. This has temporarily dampened the appetite of some market participants. German companies were even more reluctant to make acquisitions than their foreign competitors.
S. Reifenberger: In your view, what are the main deal drivers in the industry at the moment?
F. von Alten: M&A transactions in industrial machinery and components are basically driven by internationalization and market consolidation. However, the topics of digitalization, automation, robotics, environmental technology and saving energy and resources in the production process are of particular importance.
S. Reifenberger: Which factors/criteria lead to a relatively high purchase price, which to a lower one?
F. von Alten: Higher purchase prices can be realized with the following factors: high level of digitalization, IoT, Industry 4.0, energy efficiency, interesting growth prospects, international customers without one-sided dependence.
Low purchase prices tend to be paid for companies with less than US$ 20 million in sales, a low level of product digitalization or with low innovation and high dependence on cyclical industries.
S. Reifenberger: Is it a good time to buy industrial machinery companies, or rather to sell one's business?
F. von Alten: Very good prices are still being paid for companies that have come through the pandemic well up until now and are posting solid results, especially if they come from the growth sectors and offer innovative products. For buyers, the market is currently interesting if target companies have suffered from the pandemic in terms of liquidity but are healthy at the core. The low interest rates currently still offer a good market environment for acquisition financing.
S. Reifenberger: What kind of machine construction companies are particularly sought after at the moment, which companies are difficult to sell? If you had a sales mandate in this industry right now: Which buyer group would you prefer to target (strategists or private equity), and in which regions would you look for buyers (focus on Germany, pan-European, or a specific region, e.g. North America or Asia/India/China)?
F. von Alten: For my assessment of “hot” sectors please refer to the previous questions. Strategists and private equity are currently both looking for targets. However, private equity - with the exception of restructuring funds - tend to be somewhat more reluctant to invest in capital-intensive manufacturing companies. Their focus is more on services, IT/software, and healthcare. Apart from transactions within Germany, America has been the number one buyer country for Germany for many years. Mechanical engineering "Made in Germany" is of course in demand by the leading economic nations. We see purely domestic transactions, but also interest from the USA, China and Japan. However, in the future there will be a tightening of the checks on transactions in core industries (AI, robotics, etc.) by the Federal Ministry of Economics with buyers outside the EU. The unchecked globalization trend has slowed down somewhat.
S. Reifenberger: Which deal from the industrial machinery sector in the recent past would you describe as outstanding or most relevant for M&A activity?
F. von Alten: I found the announcement of the financial investor The Carlyle Group (NASDAQ: CG) on 29.10.2020 to acquire Flender GmbH, a global market leader in gear manufacturing, from Siemens AG for US$ 2.4 billion very interesting.
S. Reifenberger: What further development do you expect for the industry, especially in the area of valuation?
F. von Alten: If the impact of the pandemic is contained in the first half of 2021, multiples will stabilize, but in the short-term they will not generally rise again to the level of the 2nd half of 2018/1st half of 2019. For the "hot" sectors, they will remain at a high level.
S. Reifenberger: Thank you very much for your comments.
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