Turning risks into advantages: M&A as a growth engine for industrials

As trade volatility reshapes global supply chains, industrial CEOs can use M&As for growth, innovation and transformation.

In brief

• Many industrial manufacturing companies have delayed M&A deals due to uncertainty; 47% still plan to pursue M&A in 2025, according to an EY survey.
• Companies are keen to make progress on growth strategies ranging from AI integration to improvement of supply chain resiliency.
• Deal-seekers that adopt an M&A strategy that blends short-term actions with longer-term goals can still use deals to make progress on key agenda items.

In the current, unpredictable trade and regulatory environment, the M&A market for industrial manufacturers may seem like a minefield, strewn with unseen risks. Companies that pick their moves with an eye on long-term value creation, however, can find opportunities that build enterprise value while others wait on the sidelines.

Source: EY-Parthenon CEO Outlook Survey

M&A and transactions: Do you expect to actively pursue any of the following transaction initiatives over the next 12 months?

Source: EY-Parthenon CEO Outlook Survey

While the survey shows CEOs’ interest in doing M&A deals is lower but still strong, the number of respondents expecting to pursue joint ventures or alliances is notably high, at 70%. JVs or strategic partnerships can be a less expensive way for companies to pursue their growth agenda without the full capital commitment of an acquisition.

The question for industrial company leaders considering an M&A strategy is how to balance the complicated stack of market circumstances and come out with a winning approach – indeed, how to turn the uncertainty to one’s advantage. For many, the question isn’t whether to do deals, but how to rethink priorities to allocate capital wisely in the short term while preparing for needed long-term strategic transformation.

Industrials’ underlying appetite for deals will continue to generate activity in 2025 and beyond

First, industrial manufacturing companies across subsectors have a variety of strategic needs that they can address through M&A. These are reflected in current market trends, such as upgrading aging infrastructure, enhancing operation efficiency and embracing new technology. One important strategic trend, spurred by new tariffs, is the onshoring of manufacturing. While uncertainty about the specifics of tariffs is causing many companies to delay deals, the general trend toward higher tariffs could make US companies attractive acquisition targets for companies that want to sell products in the US market.

M&A opportunities amid macro and geopolitical uncertainty

Figure 3
Source: EY-Parthenon CEO Outlook Survey

The global industrial products sector is collectively sitting on significant financial firepower to make acquisitions following a market cap boom to over $2 trillion in 2024, fueled by profits from strong market demand, strategic acquisitions and operational performance. Prospective buyers with cash on hand for acquisitions have an advantage over those that must borrow when interest rates are high or turbulent. Based on EY-Parthenon client experience and press reports, companies in machinery, electric equipment, automotive and chemicals sectors have been poised for big moves. 

In the near term, valuations are trending lower, making targets more attractive (though also potentially scarcer as fewer quality assets are offered for sale), and, with many companies being scared off by uncertainty, there is less buyer competition in the market. Companies may also find opportunities in the mid-market range, between $1 billion and $10 billion, where year-on-year growth is still generally positive and where deals are less likely to attract antitrust regulatory scrutiny. Another facilitator that may lift the M&A market is the potential for lower interest rates later in the year, presenting chances for more affordable debt financing and avenues for growth.

Industrials are focusing on three types of M&A

In recent months, industrial manufacturers have notably steered clear of major, transformative mergers-of-equals and instead have conducted transactions primarily in three comparatively lower-risk categories: 

M&A and Transactions: What is the main focus of your acquisition strategy in the next 12 months?

Figure 4
Source: EY-Parthenon CEO Outlook Survey

Bolt-on deals, where an industrial company acquires a smaller company with a specific product or portfolio that strengthens or complements its existing products, with a focus on increasing revenue growth. In the short term, companies can identify targets that enable them to improve resilience and cost efficiency in supply chain configurations. Medium-term goals could be to acquire assets to develop supply chains in lower-tariff countries. Larger companies can carry out bolt-on or tuck-in deals by acquiring mid-market companies in complementary business areas.

Manufacturers can target software, for example, to strengthen their industrial software portfolio to accelerate digital transformation and AI enablement. For example, Siemens is acquiring Altair Engineering to add AI-powered simulation capabilities.

A notable driver, and a kind of subcategory, of bolt-on deals, is supply chain reconfiguration. Tariff uncertainty and growing risks of sustained trade wars are disrupting supply chain networks that have grown in recent years in number, value and complexity. Tariffs play a critical role in shaping supply chains, influencing cost structures and supplier relationships and M&A decision-making. Industrial manufacturers face difficult choices in the current politicized environment and plentiful risks due to more global, integrated supply chain networks they have developed and strengthened since the COVID-19 pandemic. 

While the details are evolving, tariffs are becoming a new fact of business life for the foreseeable future. M&A deals with exposure to risks from unsettled tariff rules may need to be deferred. Growing global trade protectionism can be expected to drive growth in M&A activity. Companies can use M&A to carry out relocation strategies or to establish operations in multiple regions, thereby reducing reliance on any single market and diversifying the supply chain base. Tariffs affecting Canadian, Mexican and Chinese imports are compelling industrial businesses to reassess their sourcing strategies and relocate to the US, India, Malaysia, Japan and Vietnam. 

Industrial sector dealmakers are aiming to localize operations and will look to acquire domestic firms with established manufacturing capabilities. The pace of US inbound deals could accelerate as international firms seek strategic US-market footholds or technology partnerships.

Consolidation deals, mergers of players whose businesses are similar or complementary, where value is created through achieving greater scale, capacity and cost synergies. An example is the acquisition by Herc Holdings of H&E Equipment Services, merging the third- and fifth-largest players in the rental machinery segment. 

Companies considering consolidation opportunities can take the time now to strategically assess peers as targets for cost-synergy goals to lay the groundwork for longer-term goals of consolidating market leadership in a sector or sub-sector.

Strategic growth deals, aimed at expanding end-markets reach by acquiring digital solutions. The targets may have different products, customers or business models than the acquiring firm, but they are usually smaller in size. 

Strategic growth mergers allow companies to continue to execute an M&A agenda by acquiring digital solutions, such as IoT, AI, remote sensing and predictive technologies, or for business continuity, such as data centers, or consumer experience, such as aftermarket services. Moves like these should be seen as part of a longer-term strategy to strengthen market position across the industrial software value chain by acquiring assets for specialized digital solutions.

Beyond M&A: Continuing to build through divestments and JVs

In cases where acquisition or partnering targets aren’t clear or easy, it may make sense in the near term to streamline the organization through strategic divestments. Divestitures and spin-off trends in industrials indicate a shift toward leaner operations and pure-play market positioning, laying the groundwork for an uptick in scale, consolidation and bolt-on M&A activity in 2025-2026 Based on past patterns and the current trend in the sector away from conglomeration and toward specialization, the scale of divestitures appears likely to cover a broad spectrum, from modest mid-market exchanges to large-scale deals. In the mobility sector, for example, OEMs and suppliers are right-sizing and restructuring their portfolios. Companies can reshape business models to focus on profitable and recurring revenue segments and to align with geopolitics, consumer perceptions and market dynamics.

Joint ventures and partnerships are an attractive option when M&A deals are seen as challenging or higher risk because they can help organizations achieve strategic goals while requiring lower levels of investment and commitment. This is probably why 70% of industrial CEO respondents said they plan to enter a JV or partnership in the next 12 months. A JV can be a way to access resources or new markets or to combine complementary capabilities to innovate new products or services. A JV can also be structured as a temporary or project-specific arrangement, compared with a more permanent acquisition.

A staggered M&A strategy during Trump 2.0 to balance short-term wins with a long-term agenda

Deal-seekers that adopt a staggered M&A strategy that blends short-term actions with medium-and long-term goals – for example, by prioritizing lower-risk opportunities with limited direct exposure to tariffs – can still make progress on acquisitions such as bolt-on transactions to improve supply chain resilience or strategic M&A to acquire digital capabilities.

In general, industrial manufacturers stand to benefit by using the current M&A market as an opportunity to position themselves for more strategic, long-term transformation when the political and business environment becomes more favourable.

By taking a risk-based approach to deals, industrial companies can move ahead with tailored M&A strategies and turn uncertainty into a competitive advantage by being more resilient than their peers amid geopolitical volatility. Leaders will need to balance M&A plans with risk management strategies, flexibility and adaptability, so they can remain agile and ready to pivot in response to policy changes that could impact deal activity. M&A moves that appear to make solid economic or strategic sense should be prioritized.

In this context, below, there are several strategic approaches and tactical moves industrial companies can make to be M&A opportunity-ready in 2025 and beyond:

• In general, in the current environment, companies should consider pursuing deals that help promote their growth agenda, but which entail less cost and less risk, for example mid-market deals instead of megadeals, or deals that fall in the bolt-on, consolidation or strategic growth, rather than transformative, categories.
• Companies with M&A plans need to review their current business operations and supply chains, including evaluating supplier or product substitution opportunities to be prepared as an acquirer in the market.
• Companies with high exposure to international trade can critically examine their geographical presence and conduct scenario planning to understand the current and potential future tariff picture globally.
• US-based companies with high export exposure should evaluate their cost-competitiveness in overseas geographies and understand if M&A can be used to make supply chains more cost-effective through nearshoring or regional production.
• By planning early for M&A, companies can be ready to take advantage of lower valuations in certain sectors or countries due to higher uncertainty or weaker position in the market, and the possible availability of more and better target options to choose from.
• Use AI along with industry insights to support scenario planning, identify targets and carry out diligence to increase the likelihood of successful outcomes through M&A. Companies should consider using AI and other emerging tools and technologies to embed digital transformation as part of the M&A process and agendas.
• Organizations should be prepared for potential economic changes, both positive and adverse, that may affect M&A plans. Anticipated beneficial changes, like lower interest rates, may not happen or may take longer than expected. Inflation remains stubbornly high in the US and could be exacerbated by potential labor shortages in coming months.

Thank you to Jitin Verma, Lindsay Sloan and Abhishek Gupta for their contributions to this article