Diversified industrial product companies plan to pursue deals and remain cautiously confident despite challenges
Diversified industrial products (DIP) companies remain conservative and confident despite being in a more challenging environment than cross-sector companies overall, according to the 15th Capital Confidence Barometer.
Although their appetite for transactions remains below where it was a year ago, more than half of diversified industrial products companies plan to pursue a deal in the next year, and a strong minority to a slim majority retain confidence in dealmaking fundamentals — particularly in terms of the number and quality of acquisition opportunities.
Further, in a persistent low-growth environment, where many gains in profitability have come from restructuring, cost reductions and increases in operational efficiencies, DIP companies are under pressure to deploy capital to add top-line growth. This may explain the optimism executives feel about the M&A market, with more than one-third expecting it to improve in the next 12 months.
Large deals in subsectors such as agrochemicals and aerospace and defense are in the headlines. Deal participants often must divest certain businesses to comply with antitrust requests from regulators. DIP companies have also faced pressure from activist shareholders to sell operations perceived as underperforming or noncore.
These divestitures create new buying opportunities for other industry players. Almost half say they have five or more deals in the pipeline, and a quarter say they expect to complete more deals than they did in the previous 12 months.
New technology tops the list of strategic drivers to acquire within the industry
When DIP companies look for acquisitions within their sector, new technology and new production capabilities are benefits that top the list, according to a quarter of respondents. More than one third cited changes in customer behavior as their second most important factor.
In a highly competitive market, the most successful DIP companies are closely in tune with their customers’ needs and distinguish themselves through innovative products and services. Rather than develop all new technologies in-house, many DIP companies find it more efficient to acquire niche companies and startups with intellectual property that can be brought to market more quickly.
As such, they are looking at M&A, joint ventures and strategic alliances as a means to close the gap.
Where they have made investments in key areas, such as automation, they are seeing results, with 43% of diversified industrial products executives (versus 37% of global executives) indicating that they are seeing an increase in productivity due to more automated processes.
DIP companies use big data and analytics to help maximize competitive advantage
Technology is also playing a much larger role in transactional decision-making, with 93% of DIP companies turning to big data and analytics to help them maximize their advantage when it comes to
A savvy combination of transactions-based, analytics driven digital data and human insights can enable executives to improve ROI across the capital and transaction life cycle.
As we look ahead to the next 12 months, we expect DIP companies to take their cues from IoT leaders like GE Digital and use M&A to acquire new technology that helps them to become more relevant to their customers and strengthens their competitive advantage.
EY Americas Transaction Advisory Services Leader
Diversified Industrial Products