Running on idle, but itching to move ahead: M&A prospects in industrial manufacturing and automotive

Sascha Beer Partner, Corporate Finance / M&A Leader, PwC Switzerland 09 Nov 2020

Deal volumes in the industrial manufacturing and automotive sectors slumped in early 2020 as entire industries practically shut down. But by mid-year there were already signs of an upturn in activity. Despite obvious casualties in this sector, a number of key trends will drive specific M&A hotspots once valuations have stabilised and debt financing is easier to come by. How do developments in Swiss M&A activity compare with the developments described in PwC’s recently published global M&A insights?

As in practically every industry, the Covid-19 pandemic threw a wrench in the works for many industrial manufacturing and automotive (IM&A) companies, especially in the first few months of stringent measures across the globe. A prime example would be aircraft manufacturers, who for obvious reasons have been hard hit by massively reduced travel and still, despite government support, have serious concerns about the future – not least because of growing environmental pressure. 

But the pandemic is only part of the story. Even before Covid-19, many sections of the IM&A industry were trying to get their head around serious disruption. If anything, the events of recent months have merely increased the urgency with which companies are having to respond to four major underlying trends. For many of them, mergers and acquisitions might turn out to be the most efficient way of meeting the challenge.

Four main drivers of M&A going forward: 

  • Acquisitions and investment to strengthen supply chains

Covid-19 has accentuated the importance of resilience, among other things generating increased interest in domestic and near-shore supplies. Added to this, liquidity pressures are encouraging companies to simplify their businesses, creating opportunities to acquire established core product lines or increase presence in key markets. The industries urgently needing to secure their supply chains include aerospace and defence. Facing the biggest crisis in its history, aerospace is likely to see serious consolidation among suppliers, creating M&A opportunities.

  • Investments into business models that can accelerate digital transformation

The crisis has swept away most of the remaining objections to the case for digitalisation. Companies are more and more interested in technology-enabled solutions and services that boost operational efficiency through automation and streamlined processes. They’re also facing competitive pressure to innovate in areas such as Internet of Things – with the potential for deals involving cash-rich private equity operators wanting to capitalise on emerging trends. Areas where this type of activity might be expected include engineering and construction. Also, industrial manufacturing companies further down the digital transformation and automation road – including digital supply chains − are proving to be more resilient, which is bound to increase M&A activity in this area.

  • Regulatory and sustainability-driven investment

There’s still growing stakeholder pressure on companies to invest in enhanced green technology capabilities and next-generation materials and energy. Pressure on the regulatory and compliance side is also upping the ante in terms of digital monitoring and reporting capabilities. Among other things, we expect to see this trend boost M&A activity in business services: providers of many essential services required by regulation or company policy have proven their ability to cope with virtual working environments, and are likely to continue flourishing and be a source of M&A opportunities post-Covid-19.

  • Mergers and acquisitions to access talent and specialised skills

This trend is connected among other things with the accelerated adoption of new technology. Companies are realising that it’s not just about investing in tech – but also in people who know how to operate it as part of entirely new business models and services. This might well apply to the automotive industry, for example, as companies seek digital talent and technologies connected with the rise of electric vehicles.

There’s no doubt that the market will remain challenging. But life, and business, goes on, and dealmakers should still expect to see significant opportunities in the industrial manufacturing & automotive industry.

Global industrial manufacturing and automotive deal volumes and values

graphic 1

“Despite the immediate challenges the pandemic has presented, Covid-19 has been a unique chance for companies to rethink the way they manage, preserve and create value. There are great opportunities ahead for those who can read the changes in the landscape.”

Sascha Beer, Partner, Corporate Finance/M&A Leader, PwC Switzerland
What about M&A in the Swiss industrial manufacturing and automotive sector?

Shifting the lens to Switzerland we see similar developments. Within industrial manufacturing and automotive, certain segments have been hit extremely hard by COVID-19, while others have demonstrated impressive resilience. Another notable trend is that while the sector has been impacted heavily by the crisis, in the third quarter of 2020 Switzerland has seen a stronger recovery in M&A than the overall DACH region.

The hardest hit industries in this country have included mechanical and electrical engineering, which according to Swissmem has seen a massive decline in the wake of the pandemic. In the second quarter of 2020, new orders fell by 19.5% year-on-year, sales by 19.7%, and exports by 24.6%. Reasons for the massive decline are the heavily impacted watch and luxury markets worldwide, with a massive effect on the entire value chain. The same goes for the automotive and aerospace sectors, to which many Swiss suppliers and machine tool producers are exposed.

The sectors that have proven to be very resilient include injection moulding, especially for medical disposables, and medical device manufacturers − including suppliers of production equipment and electronics further up the value chain, whose products are needed for the treatment of COVID-19 patients.
 

Swiss M&A Industry insights

Find here more detailed analyses about M&A prospects in industrial manufacturing and automotive

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To summarise: itching to move ahead 

Despite Covid-19, M&A will remain an attractive means of preserving and creating value in the IM&A industry. While there has to be a focus on short-term measures to minimise leakage, manage stakeholders and restructure finances and operations, businesses need to rethink the future and the way they preserve value in a way that reflects rapidly changing material, social and environmental expectations. They also have to reconfigure where to unlock value in the business – which will also involve reassessing how they manage their human, social and reputational capital. In this respect Covid-19 may have been a blessing, allowing companies to re-evaluate their core businesses and consider reconfiguring in ways that had previously seemed too daunting or impossible. The road ahead will be bumpy at times, but the industry is itching to move ahead, and M&A activity will reflect this urge.

 

Contact us

Sascha Beer

Sascha Beer

Partner, Corporate Finance / M&A Leader, PwC Switzerland

Tel: +41 58 792 15 39