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Deals to boost growth and long-term value through digital transformation: M&A prospects in industrial manufacturing and automotive

Michael Huber Director, Deals Industrial, Manufacturing & Automotive, PwC Switzerland 28 Sep 2021

Recovery in the industrial manufacturing and automotive (IM&A) sectors will centre on dealmaking. Now that the uncertainty of 2020 has given way to a clearer view of future demand, with better vaccination rates and eased COVID restrictions boosting economic optimism, many companies have overhauled their strategies and are seeking to use mergers and acquisitions to realign their portfolios to value creation. The winners will be those with the financial strength and strategic foresight to exploit deals to execute on structured value creation plans. How are PwC’s latest global M&A insights reflected in developments in dealmaking activity in Switzerland?

In the second half of 2020 the areas of lively dealmaking in IM&A are likely to include transactions that accelerate digital transformation – for example boosting operational efficiency by means of automation or harnessing low-touch, digital go-to-market channels. Other M&A hotspots look set to include innovative technologies that enable companies to keep up with industry trends, regulations and ESG requirements. While these technologies vary depending on the industry, they include batteries, autonomous vehicles, additive manufacturing, next-generation materials, production with non-fossil energy sources, and tools for monitoring and reporting ESG performance. We’re also likely to see deals enabling companies to acquire specialist talent in technology or engineering, and for original equipment manufacturers (OEMs) to build more resilient supply chains.

Three main drivers of M&A going forward:

1. Increased availability of capital

The availability of increased volumes of capital is driving growing M&A activity in the IM&A sectors. As in many other industries, the action is dominated by private equity (PE), which facilitated some of the largest deals in the industry in the first half of this year. With PEs accelerating their fundraising activities and hundreds of special purpose acquisition companies (SPACs) actively seeking acquisition targets, dealmaking is likely to remain lively in the second half of 2021 and into 2022.

In the EU, a EUR 2 trillion stimulus package (consisting of the EU’s long-term budget and NextGenerationEU’s Recovery and Resilience Facility to facilitate post-COVID rebuilding) looks set to increase the amount of capital available for investment in Europe. This package is in tune with the IM&A sectors’ focus on increasing tech-enablement and digitalisation, plus the growing need to address ESG issues proactively – all areas where strategic M&A activity can facilitate growth. 

2. Industry convergence between IM&A and technology

While adopting technology is nothing new for industrial manufacturing and automotive companies, COVID challenges have made transformation even more urgent. Companies are using digitalisation to boost operational efficiency and open up new revenue streams. Another trend is for businesses in all sectors to build software and sensors into their products and components to make it easier to sell ongoing services and data analytics subscriptions – a development that is blurring the lines between industries.

3. Environmental, social and governance performance in focus

Deal discussions now include ESG concerns as a matter of course, reflecting their anticipated impact on businesses and the fact that they’re now being taken into account in strategy and valuations. In the IM&A sectors there is a particular emphasis on energy use, production process innovation, electric vehicle battery and fuel cell adoption, supply chain resilience, health and safety, cultural considerations, and diversity and inclusion. For example in the engineering and construction industry there’s growing regulation around energy efficiency and greater calls from customers and investors to meet specific ESG standards.

Global Industrial Manufacturing & Automotive industry sectors Deal Volumes and Values

Bar chart showing M&A volumes and values globally for the Industrial Manufacturing & Automotive industry sectors. After the pandemic-driven drop in the first half of 2020, deal volumes recovered beyond pre-pandemic levels in the second half of the year. They decreased slightly in the first half of 2021 but remain above pre-pandemic levels. Deal values were also recovering well after the pandemic-driven drop, however they peaked in the first quarter of 2021 then fell back in line with levels at the end of 2020.

Source: Refinitiv, Dealogic and PwC analysis

EMEA is has returned to its position before the pandemic as the region with the highest deal activity. There is currently a perfect storm for M&A, with stock market valuations climbing to new heights, balance sheets flush with cash and debt financing readily available. At the same time, corporates continue to streamline their portfolios, selling assets that are no longer seen as part of their core service offering. Last but not least, the pandemic has made all of us rethink our values and priorities in life, prompting successful entrepreneurs to reconsider a sale of their business to take advantage of the currently favourable environment.

What are the M&A trends in the Swiss industrial manufacturing and automotive sector?

With vaccination rates increasing and travel restrictions being lifted to a large extent, capital deployment can be made with a higher degree of confidence, resulting in a further uptick in M&A activity over the next months. Corporates, shifting from an operational to more of a strategic focus, are expected to accelerate their acquisition spree and use M&A as an active tool to get access to adjacent technologies and broaden their geographic footprint. At the same time, Swiss companies, well known for their innovative technologies in fields like automation, robotics, sensors or fluid control, are benefitting from an ongoing trend to further automate and digitise manufacturing processes. These companies will likely be on top of the list for a wide range of domestic and foreign acquirers, including PEs, family offices, and SPACs. 

“Corporates, shifting from an operational to more of a strategic focus, are expected to accelerate their acquisition spree and use M&A as an active tool to get access to adjacent technologies and broaden their geographic footprint.”

Michael Huber, Director, Deals Industrial, Manufacturing & Automotive, PwC Switzerland

Looking ahead: a return to growth, lively M&A activity – but a need to focus on value creation  

In the second half of this year, companies in many areas of the industrial manufacturing and automotive sector are likely to see a return to growth. Some companies are going to be looking to mergers and acquisitions to fill gaps in capabilities. Demand from investors – corporates, private equity and now also SPACs – for assets focused on technology has led to increased competition. As in other sectors, CEOs wanting to justify higher valuations and make sure deals actually boost earnings need to be disciplined and focused on the value potential of the transaction.

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Michael Huber

Michael Huber

Director, Deals Industrial, Manufacturing & Automotive, PwC Switzerland

Tel: +41 58 792 1542