Current M&A trends in the industrial machinery & components sector
Dr. Florian von Alten, leader of Oaklins’ industrial machinery & components team, in an interview with FINANCE Magazin
FINANCE Magazin, a leading bimonthly trade magazine published by the F.A.Z. publishing group, covers finance, M&A and capital market topics. Managing editor Sabine Reifenberger interviewed Dr. Florian von Alten, managing partner of Oaklins Angermann AG, in January 2021 on current M&A trends for companies in the industrial machinery & components sector.
Florian has made his mark as a professional M&A advisor for 27 years now, closing over 110 transactions. Being able to count on 850 Oaklins professionals in 45 countries worldwide, he also looks and acts beyond national borders. Below he gives us his assessment of the sector’s M&A activity in the midst of the pandemic.
S. Reifenberger: What’s your assessment of the industrial machinery & components sector at the moment? How sustainable do you consider the current earnings level and company valuations?
F. von Alten: The real production volume in the industrial machinery & components sector has fallen by 14% in 2020, mainly due to COVID-19. 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 first lockdown — fortunately recovered very quickly before the growth impulses lost steam again in Q4 due to the rising COVID-19 case numbers. For 2021, experts from the German Engineering Federation (VDMA) (Verband Deutscher Maschinen- und Anlagenbau) forecast sales growth of around 4% in the industrial machinery & components sector. This forecast is supported by expectations of the COVID-19 vaccine, the change of government in the United States 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 currently sit slightly below 2019 levels due to the market uncertainty. Within the machinery and 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 three 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, a total of 178 transactions took place in the industrial machinery & components sector with German participation up to 11 December 2020. That represents a 39% decline compared with 2019, when 115 more transactions were realized. Across all sectors, reported transactions dropped by only 19% (from 2,288 to 1,861). Thus, there was an above-average slump compared with other sectors in 2020. Not only did the lockdown in spring 2020 directly affect companies in the machinery and components sector, but interrupted supply chains and underutilized capacities at their buyers also made an impact. This has temporarily dampened the appetite of some market participants. German companies proved 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 & components are basically driven by internationalization and market consolidation. However, the areas 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, and which to a lower one?
F. von Alten: Higher purchase prices can be realized with the following factors: a high level of digitalization, Internet of Things (IoT), Industry 4.0, energy efficiency, interesting growth prospects and 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? (Would you focus on Germany, the pan-European region, or a specific region, such as 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 — tends 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 United States, China and Japan. However, in the future there will be a tightening of the checks on transactions in core industries (artificial intelligence [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 October 2020 to acquire Flender GmbH, a global market leader in gear manufacturing, from Siemens AG for €2 billion (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 second half of 2018 / first half of 2019. For the hot sectors, they will remain at a high level.