MANUFACTURING M&A DEALS INCREASE TO $16 BILLION IN 3Q10

The merger and acquisition (M&A) deal value in the global industrial manufacturing (IM) industry in the third quarter of 2010 continued to improve year-over-year as well as from the second quarter of 2010, according to the PriceWaterhouseCooper (PwC) U.S. report, Assembling Value: Third-Quarter 2010 Global Industrial Manufacturing Mergers and Acquisitions Analysis. This increase in deal value was fueled by three announced mega-deals (transactions of $1 billion or more) in the quarter, two of which had values greater than $4 billion.

While the number of deals decreased slightly in Q3, with 29 compared to 33 in Q2 2010 and 32 in Q3 2009, the deal value in Q3 grew significantly, to $16 billion, compared with $7.5 billion in Q3 2009 and $10.8 billion total in the first half of 2010. Additionally, average deal value, which was $600 million in Q3, increased over the first two quarters of 2010 with $200 million in Q1 and $300 million in Q2. Average deal value in Q3 2010 was also much higher compared to Q3 2009’s $200 million average. Most of the IM activity during Q3 involved targets classified as industrial machinery and fabricated metal products manufacturers.

Despite the improvement in many global economic trends, smaller deals and transactions with undisclosed values remain drivers of overall activity. However, at the same time, the level of middle-market, large and mega-deal activity improved, with three mega-deals in Q3 compared to only two during the first half of 2010. Mega-deal value for 2010 is significantly greater than that of full-year 2009, when only one was announced the entire year. Moving forward, the near term outlook remains favorable for further improvement. “While cash conservation, cost containment and margin expansion continue to be trends, valuations remain constrained relative to historical levels, which look to continue to present buying opportunities for industrial manufacturing companies with strong balance sheets,” said Barry Misthal, U.S. industrial manufacturing leader, PwC. “The first three quarters of 2010 ended on a strong note, and we believe a recovery in deal activity will continue as the year draws to a close.”

Building on growth from last quarter, transactions including U.S. targets and/or buyers continued to be key drivers of deal activity during Q3 with 41 percent of the quarter’s deals involving a U.S. entity, an improvement over both 2009 and the first half of 2010. Similarly, almost 50 percent of total deal value during Q3 was attributable to U.S.-affiliated activity, signaling a comeback in comparison with the 40 percent for full-year 2009 and 46 percent for year-to-date 2010. Activity affiliated with BRIC (Brazil, Russia, India and China) countries fluctuated in the first three quarters of 2010 with four deals for BRIC targets in Q3, seven in Q2 and none in the first quarter of the year. Of the four deals announced this quarter, three were for targets in China, making it the key driver of activity.

Also in Q3 2010, strategic investor contribution declined relative to prior periods. With asset valuations constrained by fundamental considerations, financial investors that have adequate capital resources, access to financing, or both, may be looking to achieve long-term strategic goals by means of increased acquisition activity. The increase in financial investor contribution in Q3 relative to prior periods continues a trend observed since 2009 that is moving the percentage of financial investments back up toward historical levels. Two of the three mega-deals in Q3 were made by financial investors, indicating that financial investors may be getting more comfortable with higher-value IM deals.

CURATE’S EGG: THE CHANGING DEAL ENVIRONMENT
The third quarter Assembling Value report takes a closer look at a global economy characterized by instability and its impact on the M&A deal environment. Today’s global economy is like a curate’s egg. Economic expectations are good and bad, positive and negative. The concept of a mixed bag is especially relevant to the IM industry’s M&A market. On the positive side, the volume and total value of deals announced during the first three quarters of 2010 increased significantly from the previous year, an indication that the global economy is stabilizing. The downside is that worries about a protracted economic recovery or another recession have many global buyers and sellers taking a wait-and-see approach to deal making. Due to increased uncertainty, companies are structuring deals in new ways and handling them differently. Specifically, many are avoiding large, staged auctions, except in cases that involve a sizable, high-profile asset.

Instead, companies are trending towards one-to-one negotiations in off-market deals, where the buyer proactively identifies and approaches the target. Additionally, IM companies have become more cautious and diligent about what they are buying. They no longer favor diversification as a global M&A theme but rather are looking for deals that can provide new strategic opportunities.

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