Mega Deals Drive Q1 Industrial Products M&A

Chemicals – The volume and value of deal activity declined significantly during the first quarter of 2012. Deal volume was the lowest in three years and deal value was the second-lowest since the recession ended in 2009. The decline reflects concern over sovereign debt issues in the Eurozone, general economic uncertainty, and an expected decline in earnings for many chemicals producers.  The business environment among major chemical end-user industries has improved, but many companies have not returned to pre-recession operating levels.  Despite the weak M&A environment, mega-deal activity (deals valued at $1 billion or more) increased, with five such transactions, all centered on North American targets, driving nearly $10 billion in value.  Looking ahead, strategic buyers continue to build cash positions.  Therefore, M&A activity could increase as strategic players seek to acquire growth in the face of continued uncertainty and relatively low valuations.

Engineering & Construction – M&A activity remained weak during the first quarter, with declines in the volume and value of transactions.  Deal volume was the lowest in the past 12 quarters.  The recovery remains uncertain and investors have largely remained on the sidelines.  Construction and construction machinery accounted for the bulk of deals, driven by infrastructure and urbanization needs of emerging markets.  Asia dominated activity as Chinese and South Korean companies grew stronger and more active. Governments there are spending on infrastructure, urbanization, water treatment and energy/power.  Growth expectations in emerging markets remain greater than those for the developed world.  In Brazil, the outlook is positive ahead of The 2014 World Cup and the 2012 Olympics in Rio de Janeiro, as both require significant stadium, infrastructure and transportation projects.  Given that organic growth is hard to achieve and the M&A is constrained, indirect consolidation will likely rise in the sector.

Industrial Manufacturing – The overall number of transactions during the first quarter declined slightly, while value for deals over $50 million increased 38.9 percent sequentially.  Cautious optimism for the US manufacturing sector was partly offset by fears of a prolonged recession in Europe and a hard landing in China.  Corporate profits were solid, but the uncertain outlook led investors to trim acquisitions.  Divestiture efforts represented a major contributor as companies restructured their European assets and focused on US targets.  Deal activity centered on energy, technological advancement and water treatment.  The outlook for the sector remains cautiously optimistic as the worldwide economy continues to recover.  The slow but stable growth of the US economy provides a bright spot, while Chinese industrial manufacturing appears to be rebounding, following a period of decline.

Metals – Overall deal value increased substantially during the first quarter with mega-deals (valued at $1 billion or more), comprising more than 68 percent of the value of deals worth $50 million or more.  Divestitures represented more than 58 percent of activity, reflecting the importance of trimming nonperforming assets, as metals companies right-size and increase shareholder returns.  Asia and Oceania drove overall regional deal value, a trend expected to continue. Europe drove outbound deals, a resurgence pointing to increased backward integration as metals producers seek affordable access to raw materials amid volatile commodity prices.  Looking ahead, metals prices are likely to remain volatile, given the changing global demand and high energy prices. However, M&A totals should grow, driven by strategic cash and the desire to restructure in several emerging markets.  Balance sheets have remained strong, indicating that potential acquirers are becoming better capitalized, which bodes well for future deals.

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