PErspective in Manufacturing - Winter 2015
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The global economic outlook remains sluggish, especially given the recent slowdown in China. Persistently low oil prices, while a boon to some manufacturers, are hurting companies that make machinery and equipment for the embattled energy sector. Reduced demand from China in particular has affected industrial output from Germany, and the strong dollar and pound have hurt exports for the U.S. and U.K.
With this backdrop, companies in all sectors of the global economy are looking to achieve growth by merger. Merger and acquisition (M&A) activity in general has been extremely strong this year, surpassing $4 trillion, according to Dealogic data. Half of that volume came from the U.S., which has seen volumes rise by 30 percent.
While it has not been as frenzied as some other sectors, the manufacturing space has seen its share of deal-making, making up a steady 15 percent of overall deal volume in the U.S., according to BDO Capital Advisors’ analysis. There have been 453 M&A deals in the global manufacturing space so far this year, 106 of which were private equity-backed, according to data from The Deal. A total of 342 deals took place in North America, while Europe saw 83 deals. Six deals took place in South America and 15 deals were carried out in Asia.
This year has seen four manufacturing megadeals valued at over $10 billion, including Schlumberger’s $12.7 billion acquisition of Cameron International; Danaher Corp’s $13.8 billion tie-up with Pall Corp; Avago Technologies’ $37 billion purchase of Broadcomm; and Berkshire Hathaway’s record-setting $37.2 billion buyout of aerospace parts maker Precision Castparts, described by Reuters as the biggest bet of Warren Buffett’s career.
Defense, aerospace and aeronautical engineering firms in particular have seen robust deal-making. In addition to Buffett’s purchase of Precision Castparts, Blackstone recently agreed to buy Scottish engineering company and Boeing supplier MB Aerospace from Arlington Capital Partners for an undisclosed sum. Kidd & Company and Centerfield Capital Partners-backed Imaginetics bought Azmark Aerosystems. And, mid-market private equity firm Nautic Partners recently purchased Aerostar Aerospace Manufacturing, a maker of machined parts for commercial aircraft. According to a Nautic Partners press release, fragmentation in the supply chain for machined parts makes the industry ripe for consolidation.
There was an unexpected uptick in U.S. and U.K. manufacturing orders during the third quarter, despite the strength of the dollar and pound. U.S. manufacturing growth was driven by automobile output, business supplies and construction materials, and would have been stronger were it not for a drop in energy production, Industry Week reports. In the U.K., some economists expect the strength of the pound coupled with the global recession to dampen orders well into 2016, but one poll shows 26 percent of U.K. small and medium-sized manufacturers optimistically planning overseas expansion, The Guardian reports.
It remains to be seen whether this represents the beginnings of a recovery—analysis from The Guardian describes the increase in U.K. orders as “more blip than boom.” Global growth is expected to remain weak well into 2016, and observers expect continued strong M&A activity as companies seek out cost synergies and increased scale—bringing continued deal-making opportunities for buyout firms.
PErspective in Manufacturing is a feature examining private equity investment in the manufacturing sector.
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