Manufacturing mergers and acquisitions off to slow start in 2010

The merger and acquisition (M&A) deal activity in the global industrial manufacturing (IM) industry was weaker than expected during the first quarter of 2010, as total deal value and volume declined on a year-over-year basis and sequentially, according to the PricewaterhouseCoopers LLP (PwC) report, Assembling value: First-quarter 2010 global industrial manufacturing mergers and acquisitions analysis.

In the first quarter of 2010, there were only 11 announced deals with total transaction values greater than $50 million, representing a decline from the 16 deals announced in Q1 2009 and 31 deals in Q4 2009. In terms of value, deals totaled $1.9 billion in the first quarter of 2010, compared with $2.0 billion and $9.6 billion in the first and fourth quarters of 2009, respectively. Despite the decline in deal volume and total value, average deal value in the first quarter of 2010 increased on a year-over-year basis to $200 million in Q1 2010 compared to $100 million in Q1 2009.

"While expectations for deal activity in Q1 were weak relative to the fourth-quarter 2009 results, the belief was that year-over-year trends would improve. However, this was not the case," said Barry Misthal, U.S. industrial manufacturing leader, PricewaterhouseCoopers. "Though the year is off to a slow start, we believe the deal environment will improve throughout 2010 as credit availability continues to loosen and risk aversion continues to moderate."

Smaller deals (valued at $50 million or less) and transactions with undisclosed values dominated overall activity, which is consistent with historical trends. The level of middle-market, large and mega-deal activity continued to be constrained, although the near-term outlook for a turnaround is favorable, according to the report.

Transactions involving both U.S. targets and buyers were the key drivers of deal activity during the first quarter of 2010, reversing a long-standing trend. Of the 11 transactions announced during Q1, seven (64 percent) involved a U.S. entity. This compares with an average of 39 percent over the last four years (2006-2009). Similarly, 79 percent of total deal value during the first quarter was attributable to U.S.-affiliated activity, compared with an average of 50 percent over the last four years.

The regional breakdown of M&A deals shows that targets located in North America were the primary drivers of deal activity, as 55 percent of transactions announced were in the region. Additionally, all six transactions announced in the North American region were in the U.S. In relative terms, Asia and Oceania remained a strong region for deal activity, however, on an absolute basis, only two transactions were announced in the region compared with 35 in 2009. Similarly, the UK and Eurozone region contributed meaningfully on a relative basis, but, in absolute terms, only two transactions originated in the region.

M&A Due Diligence in a Recovering Economy
The first quarter Assembling value report takes a closer look at the role of M&A due diligence in a recovering economy and the impact it will have in the industrial manufacturing sector. As the global economy begins to recover, deal making might offer the leverage IM companies need to push ahead of the competition. It will be the companies with strong balance sheets and robust cash reserves that are in the best position for strategic M&A opportunities.

According to the report, to make the right deal, IM companies must consider how two years of economic contraction have altered the balance of supply and demand within the value chain as well as how it has significantly changed and elevated the importance of due diligence. Healthcare, climate change, commodity prices, pension plan structures, changing tax laws, company culture and the role of human resources must be factored into today's due diligence process.

M&A activity inevitably generates a certain amount of immediacy, so it pays to be prepared, the report states. Companies that might be rusty in the area of due diligence because few (if any) deals were completed during the past two years may need to dust off their existing processes and make sure the right resources are in place so they are ready when opportunity knocks.