Manufacturers Awaken To Deals Again

  • Companies wary, eyeing deals under $5 billion
  • Company restructurings providing opportunities
  • Asian buyers keen on German companies

Hints of an economic recovery are encouraging the likes of engineering and auto firms to think about buying technology, components or skills that will grow or complement their core businesses, bankers say, and some are acting now before interest rates rise and make debt more expensive.

However, with global growth projections still fragile and costs under scrutiny, companies will be steering clear of deals with a big price tag or global scale. “Most transactions are likely to focus on very specific product and customer markets as opposed to large, transformational deals,” said Ben Story, head of UK investment banking and broking at Citigroup. “Industrial M&A is largely based around utilizing existing capabilities, bundling products and services, gaining access in new geographies and leveraging existing technology to lower costs.”

Thanks to the financial crisis, many firms are restructuring to survive. German engineering group Siemens is mid-way through a 6 billion euro ($8 billion) program of cost cuts. German steel giant ThyssenKrupp has sold off a number of assets and targeted cost cuts of 2 billion euros. Swiss engineer ABB has vowed to pull out of low-margin engineering in favor of higher-margin software and systems activities—sending its shares soaring.

“The picture is not bright, but to stand still would be to step back,” said Christof-Ulrich Goldschmidt, a partner at law firm Clifford Chance.

While the value of industrial deals is down 10.5 percent to $50.8 billion so far this year in Europe—less than half the amount racked up in the pre-crisis days of 2007—a recent flurry of activity suggests more to come. France’s Schneider Electric bought British engineer Invensys for 3.4 billion pounds in July to strengthen its high-margin industrial automation business. Sweden’s Atlas Copco said in August it was buying British vacuum pump specialist Edwards Group in a deal designed to offset deteriorating profits from its mining engineering business.

“Companies are focused on doing reasonably sized deals around $1 billion to $5 billion that relate directly to their core business or are a very logical extension,” said Reid Marsh, vice chairman of Barclays investment banking division.

Overall the industrials sector, which includes carmakers and defense companies as well as manufacturers, is still a big earner for bankers, generating the second-biggest fees, after financials, with a near 15 percent share of the M&A market. After hunkering down for several years, industrial companies now have plenty of money to play with. According to data from Thomson Reuters DataStream, industrial firms are sitting on cash balances of $775 billion globally and $252 billion in Europe alone.

Meanwhile, the prices being paid for industrial companies have dropped. The average deal value to EBITDA multiple—the standard industry comparison—so far this year stands at 10.1x globally, compared to 12.8x in 2007.

Family-owned German engineering firms are particularly sought after for their expertise and technology. Private equity firm The Carlyle Group said on Aug. 23 that it had bought Klenk Holz, a German manufacturer of wood products, but did not disclose the price.

Chinese firms are especially keen on the German-speaking market. Last year, investment group Jinsheng purchased the fibers and textiles unit of Switzerland’s Oerlikon while Shandong Heavy Industry bought a stake in German fork lift truck maker Kion.

However, prying these companies loose from their owners can very tough because many German firms, which contributed to the country’s economic resilience throughout the financial crisis, do not want to give up control. “There is great interest from our Asian clients in continental European companies, especially in the German speaking world, but the issue is more about availability of targets than anything else,” said Piero Novelli, chairman of global M&A at UBS.

Thus buyers are looking more widely. Bankers say British firms are often second choice after Germany because of the perception they are tightly run with a flexible working culture. Among companies being circled right now, British car and plane parts maker GKN and French power and transport engineering firm Alstom are considered cheap and therefore attractive for potential buyers, bankers said.

GKN has a price-earnings ratio of about 11.5x compared to 14x for its peers, according to Thomson Reuters data, while Alstom has a price-earnings ratio of around 6.7x compared to 10.9x for peers.

Anjuli Davies and Sophie Sassard are correspondents for Reuters in London.