July/August 2018

38 ACQUISITIONS July/August 2018 www.drivesncontrols.com What’s driving the M&A frenzy? C ompanies in the $100bn global drives and controls sector are reaping the benefits of a booming interest in the sector from industrial buyers and from private equity investment funds who are competing to scoop up businesses. This mergers and acquisitions (M&A) upswing, coupled with attractive business models in the sector, has seen some automation companies being valued at more than ten times their EBITDA (earnings before interest, tax, depreciation and amortisation). What’s behind this frenetic activity? The fragmented nature of the sector and increasing demand from blue-chip customers for more sophisticated value- added “one-stop-shop” solutions are key factors driving the M&A activity. Corporate acquirers – mainly large industrial players – account for the vast majority of M&A activity in the sector. They can benefit from revenue and cost synergies when they integrate the acquired businesses into their own operations. The background to this is that industrial corporates have experienced relatively low levels of organic growth in recent years, but have record levels of cash on their balance sheets. They are increasingly deploying that cash into M&A to drive growth, and are doing so with a global focus. Hence the surge in cross-border M&A. US corporates have committed significant amounts of capital to investing in European automation companies. Many of these European-headquartered businesses sell their products globally and have successfully penetrated emerging markets, such as Asia. For example, Italian mid-market industrial companies – similar to the Mittelstand businesses in Germany – tend to have innovative technology and hold leading global positions in their niche markets. Publicly-listed corporates have been acquiring automation businesses to gain: additional capabilities and a broader offering, including “one-stop-shop” offerings; exposure to higher growth markets, often outside of industrial sectors; wider geographic coverage and access to emerging markets; economies of scale to reduce the drag from fixed costs; and new customers to reduce customer concentration. Private equity funds are attracted by attributes such as: underlying market growth and the trend to increasing automation; mission-critical products, integral to Recent months have seen a flurry of acquisitions and mergers involving companies in the automation and motion engineering sector. Tahs Siddique, director of M&A research in the London office of the global investment bank, Baird, examines some of the factors fuelling this activity and driving up the prices being paid for companies.