High COVID-19 vaccination rates in developed economies have led to a recent resurgence in industrial production in many countries, substantially improving the outlook of CEOs across industrial manufacturing and automotive (IM&A) sectors1. Now, both corporate players and investors have a clearer perspective on future demand, and the high levels of mergers and acquisitions (M&A) activity is a sign of their optimism about 2022.
This is leading to greater confidence in investment strategies, despite a range of macroeconomic and other headwinds: COVID-19 variants, supply chain bottlenecks, commodity price increases and a global semiconductor shortage, particularly in the automotive sector. Business leaders are reviewing their portfolios to focus on new growth areas and divesting non-core assets to take advantage of robust valuations. Deals that create the most value continue to be built through capabilities-driven acquisitions and product and platform expansion.
[1] Industrial manufacturing and automotive sectors include aerospace and defence, automotive, business services, engineering and construction, and industrial manufacturing.
M&A activity and values
Industrial manufacturing and automotive sectors deal volumes and values, 2019-2021
Sources: Refinitiv, Dealogic and PwC analysis
Deal volumes and values increased across all sectors of IM&A as dealmakers recovered from pandemic-induced slowdowns. Europe, the Middle East and Africa (EMEA) was the region with the most deals in 2021, recording almost 5,000 for the year, 42% higher than in 2020. Deal values were greatest in the Americas (approximately 44% of the global IM&A deal values) and increased by 144% between 2020 and 2021, to almost US$300bn, boosted by a number of US megadeals—those with a deal value greater than US$5bn. The top three IM&A deals announced in 2021 were mergers with special purpose acquisition companies (SPACs), underlining the continuing importance of these investment vehicles to M&A, particularly in the automotive sector. Private equity (PE) is playing a greater role, accounting for approximately 36% of deal volume and 41% of deal value in 2021, an increase compared with the average over the previous five years of 26% and 34%, respectively.
M&A hotspots
We anticipate the following areas will be M&A hotspots during the first half of 2022:
Tech-driven transactions. Mergers and acquisitions that accelerate digital transformation are likely to continue to dominate the market and lead to premium valuations. In PwC’s Global M&A Industry Trends in Technology, Media & Telecommunications 2022 Outlook, we discuss how tech convergence will continue to dominate M&A in 2022. In IM&A, technologies vary, but include electric and autonomous vehicles, batteries and charging technologies, additive manufacturing, next-generation materials, production with non-fossil energy sources, data-driven insights, and the tools to monitor and report environmental, social and governance (ESG) performance.
Industrial deals in hydrogen. Hydrogen technology will continue to be top of the agenda for many CEOs; start-ups in this field are very attractive for acquisition, and will likely see strong buyout competition.
- Shoring up supply chains. The need to build more resilient and sustainable supply chains will lead manufacturing players to make strategic acquisitions and invest through new capital expenditures.
- A war for talent. The competition for human capital is on the rise, particularly in technology engineering roles; the ‘servicification’ of industrial manufacturing has led to the need within new business divisions to employ highly skilled professionals.
Key themes driving M&A activity
- Digitalisation
- Commodity prices
- Capital availability
- Environmental, social and governance (ESG)
Digitalisation
Accelerated by COVID-19, digitalisation is now essential to maximise operational efficiency and leverage opportunities for new business models and revenue streams. One example is the rise of software and sensors, which have created recurring revenue opportunities from ongoing maintenance services and data analytics subscriptions.
Commodity prices
Commodity prices have rebounded in recent months, leading corporate leaders to rethink their sourcing and pricing strategies, while closely monitoring potential signs of inflation. The strong rebound of industrial activity has created a shortage economy with direct impacts on the availability of raw materials, increases in the cost of transportation and delays in delivery, disrupting even well-organised supply chains.
Capital availability
Private equity (PE) continues to look for opportunities to invest; capital from family offices has grown; and SPACs generated some of the largest deals in the industry in 2021. SPAC deal activity slowed towards the end of 2021, but will continue to play a role in 2022, particularly in the automotive sub-sector.
Environmental, social and governance (ESG)
The ESG agenda impacts most facets of the IM&A industry: energy storage and use, production processes, sustainable transport, supply chain resiliency, health and safety, cultural issues, and diversity and inclusion. Corporates must leverage innovative technologies to keep up with industry regulations and meet their ESG commitments.
“The race to exploit emerging technologies within the industrial manufacturing and automotive sectors will continue to fuel M&A in the coming year, and accelerate already elevated valuations.”
Aerospace and defence
- Aerospace and defence companies continue to navigate the effects of the pandemic and the sector’s impact on global carbon emissions. In spite of these pressures, optimism is growing among industry participants, as more people are vaccinated, air passenger numbers increase, and global economies begin to rebound.
- Increased travel demand is leading to growth in aircraft production; although uncertainty caused by new variants and a new wave of travel restrictions in late 2021 is expected to create fresh operational challenges for commercial aerospace companies in 2022.
- Airline industry pledges for net-zero emissions by 2050 will require M&A focused on fuel efficiency in 2022 and beyond. To reduce carbon emissions, big players are already investing heavily in developing planes that can fly on sustainable aviation fuel, such as biofuels, and hydrogen combustion and fuel cell technologies.
- We expect a focus on supply chains to drive a significant percentage of deals, as OEMs look to secure key suppliers. Small and midsized players under pressure, and those facing liquidity issues, are likely to become targets for consolidation or reorganisation.
- In the defence sector, tech-driven M&A transactions (in cybersecurity, autonomous systems, hypersonic and precision engineering) are likely to dominate the market, with many expected to be ‘bolt-on’ acquisitions. We also anticipate a wave of deal-making driven by portfolio optimisation, as some companies divest non-core assets to reinvest in emerging technologies.
- Amid heightened geopolitical tensions, higher defence sector budgets are expected to create favourable conditions for M&A. However, increased protectionism on national security grounds may result in more regulatory scrutiny and less inbound investment activity.
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Automotive
- The ability of original equipment manufacturers (OEMs) to scale production to meet an increased demand for vehicles has been hampered by supply chain disruption and a shortage of skilled labour. The shortage of semiconductors in particular has challenged the automotive sector. We expect to see companies using deal-making in 2022 to acquire the capabilities they need to produce both existing products and develop those of the future.
- We expect strong M&A related to the increase in demand for electric vehicles (EVs), including a continuation of the trend from 2021 of SPAC mergers with early stage automotive companies, particularly those in the EV and autonomous vehicle (AV) space.
- As key players shift R&D efforts and production capacities to electrification, deals will focus on digital transformation (software, connectivity, customised chips), EV battery and fuel cell technologies, and charging infrastructure.
- OEMs are likely to enter into joint ventures to share the burden of R&D expenses and help gain access to scarce components (such as semiconductors). Further alignment with governments is necessary to create charging infrastructures.
- Some traditional suppliers in the automotive sector must build exit strategies amid technological disruption across the sector. The weakest companies could be targets for turnarounds or restructuring.
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Business services
- The increase in demand for business services that accelerated during the pandemic shows no sign of letting up, as many companies continue to look for cost reductions and ways to transition fixed costs to variable costs.
- The sector continues to transition from more traditional services to tech-enabled services, with M&A extremely active around tech enablement and delivery. One example is the education technology (edtech) or remote training sub-sector, where companies are increasingly looking for expertise and capabilities delivered in a remote environment. Increased regulatory scrutiny of edtech in China may dampen investor enthusiasm due to uncertainty around growth prospects, but in other countries, we expect to see a steadily growing flow of investment capital into the edtech industry.
- Demand also continues for outsourced services, due to labour shortages and a renewed focus on portfolio optimisation. Business leaders are seeking to acquire key capabilities and divest or outsource parts of their business to focus on high growth and core areas.
- We expect M&A transactions in consulting services to continue to grow, especially those in cloud consulting, professional advisory and outsourced legal services. We anticipate further consolidation of these fragmented sectors to create greater economies of scale.
- Trends in facilities management services (for both professional and residential buildings) continue to foster M&A activity, as the pandemic has accelerated demand for cleaning and sanitisation services, and for inspection and certification businesses. We expect technology will play an increasing role in the delivery and quality of these services, with investors being particularly attracted to businesses which incorporate technology to create new revenue streams, such as preventative maintenance and other subscription-based business models.
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Engineering and construction
- Deal activity in the engineering and construction (E&C) sector is expected to remain strong in 2022 due to increased demand for engineering, building materials and residential construction. Increases in remote working, digitalisation and sustainable construction continue to intensify the need for both new construction and the retrofitting of existing domestic and office buildings.
- Higher costs and inflationary headwinds are expected in 2022, increasing pressures on already tight margins, including: raw material prices (such as timber, cement and fabricated steel), transportation costs and wage inflation (caused by labour shortages, especially of engineers and new technology experts).
- As a result, E&C companies are focused on cost savings to compensate for higher input costs, and on investing through R&D and M&A to build the capabilities needed to achieve a competitive advantage in a more digital (e.g., connected and automated constructions) and green future. E&C firms will have to optimise their portfolios by divesting non-core assets and investing in high growth areas.
- The importance of ESG targets and regulations on E&C firms will change both supply and demand for new buildings. E&C companies that focus on sustainable and responsibly sourced raw materials (to reduce carbon emissions), off-site construction companies, self-sufficient buildings, and smart cities infrastructure will likely be seen as attractive acquisition targets.
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Industrial manufacturing
- Industrial manufacturing activity increased in 2021, and we expect, in spite of inflationary headwinds and supply chain disruptions, these stronger production levels will lead to further M&A activity in 2022. Big players will likely pursue capabilities-driven acquisitions and targets that help them build greater supply chain resilience. Other companies will seek economies of scale, product portfolio and geographic expansion, vertical integration, and operational consolidations.
- Areas of focus for business leaders will be digital development, cost efficiency, innovative and technological capabilities (to compensate for the skilled-labour shortage), green competencies (ESG), new energy manufacturing, additive manufacturing and industrial automation.
- Divestment of non-core assets and reinvestment in digital and green capabilities are expected. Companies, such as automotive component manufacturers serving the internal combustion engine (ICE) market or cement manufacturers that use carbon-intensive production techniques, will have to either transform their businesses or find exit strategies.
- The abundance of capital (corporate balance sheets, PE firms, SPACs and public-funded investments) could help to foster the reindustrialisation of less-developed regions of the big economies in Europe, the Middle East and Africa (EMEA) and North America.
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M&A outlook for industrial manufacturing and automotive sectors
The outlook for 2022 is positive. Companies in many industrial manufacturing and automotive sectors have turned the corner, and cautious optimism in global economic growth is expected to lead to strong M&A activity in all regions. Technology and ESG-focused assets will be the most attractive, with strong competition and high multiples valuation from corporates and PEs. In order to justify higher valuations and ensure the deal is accretive to earnings, CEOs need to focus on accelerated value creation plans.
About the data
We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 31 December 2021 and as accessed on 2 January 2022. This has been supplemented by additional information from Dealogic and our independent research, and includes data derived from data provided under license by Dealogic. Dealogic retains and reserves all rights in such licensed data. Certain adjustments have been made to the source information to align with PwC’s industry mapping.
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