M&A activity in industrial manufacturing sector shows continued momentum

Merger and acquisition (M&A) deal activity in the global industrial manufacturing industry showed striking increases in deal volume and value in the fourth quarter of 2010, both year-over-year and sequentially from the third quarter of 2010, according to a new PwC US report, Assembling value: Fourth-quarter 2010 global industrial manufacturing mergers and acquisitions analysis.

Fourth quarter activity comprised more than 40 percent of the volume in 2010 and almost 45 percent of the year’s value, with 52 deals equaling $22.6 billion US for the quarter and 129 deals totaling $51.1 billion US for full-year 2010. Year-over-year, full-year deal volume exceeded 2009 by 37 percent and deal value grew 125 percent.

The fourth quarter’s deal volume and deal value both tallied the highest quarterly totals of the past three years. One driver of the increase in deal value was the continued growth of mega-deal activity, classified as transactions of $1 billion US or more, with four deals totaling $9.6 billion US in the fourth quarter. This brought the aggregate value of the 10 mega-deals in 2010 up to $24 billion US, almost seven times greater than that of 2009, when there was just a single mega-deal. While transactions including U.S. targets and/or buyers declined as a proportion of total deals in the fourth quarter, two of Q4’s mega-deals involved U.S. targets. This may be a sign that although many investors are likely concerned about the relatively slow growth in the U.S., there continues to be an interest in gaining access to its large market and the technologies held by U.S. players.

“Though high levels of unemployment, concern over weak economic growth and European debt woes may continue to constrain investment, we believe buyers remain optimistic in their near-term economic outlooks,” said Barry Misthal, U.S. industrial manufacturing leader for PwC. “As we look at 2011, several indicators, including strong balance sheets, reduced costs and margin growth, lead us to conclude that deal activity will continue to increase in the coming year.”

Despite the significant proportion of mega-deal targets located in North America, targets based in the U.K. and Eurozone region led as the drivers of deal activity in the fourth quarter of 2010, with 35 percent of all transactions valued at $50 million US or more announced in the region. Additionally, Q4 activity affiliated with Brazil, Russia, India and China (BRIC) grew in comparison with the third quarter, with eight deals announced for BRIC targets. North America remained a strong region for overall deal activity as well, with 13 transactions announced in the region in Q4 versus 41 in all of 2010.

Cross-border deals represented 50 percent of announced deals worth $50 million US or more in Q4 2010, up 72 percent from Q4 2009. Historically, local-market transactions have been an integral part of the M&A story, although recent trends show a lower concentration of local-market transactions taking place versus historical levels. Local-market activity has continued to decrease despite the greater political, socioeconomic and currency risks that cross-border transactions generally carry.

“As economies further improve, we expect cross-border deal activity to continue to rise as perceived rewards begin to outweigh perceived risks,” added Misthal. “The need of corporations to augment slow organic growth by entering new, faster-growing geographies and repositioning their product portfolios for increased growth will also aid this uptick in cross-border activity.”

The fourth quarter report also takes a close look at recent expansion into the VISTA (Vietnam, Indonesia, South Africa, Turkey, and Argentina) countries and the associated tax implications. Today’s IM companies have already found opportunities for growth through the establishment of operations in the BRIC countries. However, as companies seek to reposition their business strategy to meet new demands, they are now looking for new opportunities in a second wave of emerging markets such as VISTA.

For information on Assembling value and to access the full report, including the special section on the tax implications of expanding into a VISTA country, visit www.pwc.com/us/industrialproducts.