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Recover, reconfigure, and realign with new values: M&A prospects in industrial manufacturing and automotive

Michael Huber Director, Corporate Finance / M&A, PwC Switzerland 16 Mar 2021

After a 2020 of ups and downs – including unexpected twists in the course of the pandemic – deals activity in the industrial manufacturing and automotive sectors is still marked by uncertainty. Fortunes are mixed across the industry: some segments look set to face distress for a long time to come, while others will be looking to use M&A to consolidate, accelerate digital transformation and keep up with changing stakeholder expectations in areas such as ESG. How are developments in Swiss deals activity reflecting the global developments described in PwC’s latest M&A insights?

The impact of the pandemic on many parts of the industrial manufacturing and automotive (IM&A) sector has been cushioned by government support, which in many cases has been extended beyond the end of 2020. The big question mark is how long the safety net will remain in place – and the true extent of the damage that emerges after it’s gone. Once state assistance programmes are over, we’re likely to see an increase in M&A activity driven by distress and restructuring, particularly in areas such as commercial aerospace where there’s unlikely to be a recovery in demand for years.

Consolidation is another key factor that will influence dealmaking going forward. In the current environment it’s not just about achieving cost efficiencies through economies of scale. Digital transformation in segments such as automotive supply is separating the sheep from the goats, with larger players apparently able to manage the risks of digital better than their smaller counterparts. This gap opens up incentives and opportunities for mergers and acquisitions. 

For many companies, deals may well be the way forward to assure growth this year and beyond. The winners will be those with the strategic foresight and financial strength to capitalise on dealmaking opportunities by executing on structured value creation plans.


Three main drivers of M&A going forward: 
  • Industry convergence as COVID-19 accelerates digital transformation

The challenge of keeping up with technology is nothing new in industrial manufacturing and automotive, but COVID-19 has made transformation even more urgent. Digitalisation has multiple benefits, including the opportunity to boost operational efficiency, as well as providing access to new sources of revenue. The distinction between the IM&A and technology sectors is getting increasingly blurred as manufacturing companies embed software and sensors in their products and add data analytics to their portfolios.

  • Increased availability of capital

Unlike the situation during the financial crisis in 2008, where banks stopped lending to a large extent, debt financing markets have remained robust during the COVID-19 crisis. Moreover, private equity funds and other financial sponsors such as family offices have substantial amounts of ‘dry powder’ to deploy. Added to this, special-purpose acquisition companies (SPACs) are becoming increasingly popular in the US as a good vehicle for targeting high-performing assets in tech-enabled segments such as light detection and batteries. Overall the greater availability of capital has facilitated a recovery in M&A activity.

  • Focus on environmental, social and governance performance

The impact of ESG concerns on businesses is no longer a minority consideration. It’s become a standard point of negotiation in all deal discussions. The main areas of ESG focus in the IM&A industry include energy use, supply chain resilience, health and safety, and diversity and inclusion. In some cases, meeting new expectations and demand – for example for sustainable, energy-efficient structures – involves greater costs, but is unavoidable if companies want to remain competitive. ESG credentials are no long merely nice to have: many investors, including private equity firms, now factor ESG performance into their capital allocation and assessment of M&A transactions. This is likely to have a direct impact on the value of assets with a poor ESG performance going forward.

Industrial manufacturing and automotive deal volumes and values: EMEA
Automotive Picture
What are the M&A trends in the Swiss industrial manufacturing and automotive sector?

Focusing on Switzerland, the impact of COVID-19 on the business of industrial manufacturing companies varies considerably depending on the end markets served. Providers of machinery or components for automotive, aerospace, watchmaking and jewellery have been confronted with a sharp decline in revenue and new orders. Experienced in dealing with situations like this from the financial crisis and the strengthening of the Swiss franc over the last decade, most players have been able to stabilise their business and navigate through the crisis, also benefiting from short-time working arrangements and other government support. On the other hand, industrial companies serving medical or pharma end markets are experiencing unprecedented tailwind from COVID-19, resulting in record-high utilisation and full order books.

With regard to M&A, this has added additional complexity to valuation discussions between buyers and sellers, with negotiations circling around the net effect of lost revenue and government support on the one hand and the sustainability of revenue and profit patterns impacted by COVID-19 excess demand on the other. With light at the end of the COVID-19 tunnel, the valuation gap between sellers and buyers is expected to narrow again, fuelling M&A activity. Not only this, but once the dust has settled, we expect to see another wave of consolidation in Switzerland, with healthy companies buying competitors who have so far been able to resist a sale.

While topics such as energy efficiency, waste reduction and circular economy temporarily disappeared from the news after the outbreak of COVID-19, they now are back again, and providers of innovative technologies addressing these challenges are on top of the wish list of many investors – including private equity funds urged by their investors to focus on ESG and sustainability topics.

“With many areas of manufacturing and automotive facing an uphill struggle for revenues, players will need to consider deals as a means of taking control. We anticipate M&A opportunities as companies seek to reinvent their models to meet new customer demands and growing stakeholder expectations around ESG and non-traditional value.”

Michael Huber, Director, Corporate Finance / M&A at PwC Switzerland

To summarise: revenue growth and M&A driven by the need to recover, reconfigure and align with new values and expectations

Many companies in industrial manufacturing and automotive are going to have a tough time delivering revenue growth in the coming months – and maybe even years. What they need is a focused plan for value preservation and creation. We see three main strategies:

Act now to recover: The best response to uncertainty is decisive action. If used early on, restructuring and recovery services are good strategic options that can relieve distress and create greater leeway going forward.

Rethink today. Reinvent tomorrow. COVID-19 has increased the pressure to transform. Companies are seeing the urgent need to rethink and reconfigure their businesses to meet the new demands of customers and other stakeholders. Digitalisation is a key part of this – as is reassessing portfolios from a capability perspective.

Embrace the new value ecosystem. One of the most surprising upshots of the pandemic has been the way it’s propelled non-traditional sources of value such as resilience, purpose and ESG compliance into the limelight. Companies have to realise that these are now mainstream concerns that will have a major impact on value, and need to be considered now.

Whether the focus is on recovery, reconfiguring or realigning, mergers and acquisitions can potentially play a key role. So despite the uncertainty, the prospects of plenty of deals activity in industrial manufacturing and automotive are good.

Contact us

Michael Huber

Michael Huber

Director, Corporate Finance / M&A, PwC Switzerland

Tel: +41 58 792 1542