Mergers and acquisitions in the industrial sector have rebounded after a period of great uncertainty in 2022 and 2023. The macroeconomic environment has improved considerably with cost and wage inflation flattening and material supply chain disruption dissipating.

At the same time, many industrial companies have had to reconsider their manufacturing strategies, given the increasing impact of technology and innovation. Equally, many have been reshoring the production operation, bringing back their manufacturing capabilities to home countries.

The key drivers of overall M&A activity in the sector are artificial intelligence, automation, digitalisation, Industry 4.0 and other technological advancements, both as ways of mitigating competition and instigating market disruption. New digital capabilities and technologies are also a means of expanding an industrial companies’ market presence and develop new routes to market.

In terms of specific sub-sector activity, there is an increasing drive towards artificial intelligence and automation solutions in many industrial markets:

• The automotive sector is clearly being heavily driven by the shift towards electric and ultimately autonomous vehicles.

• Aerospace and defence has been supported by increasing demand, with the demand from tourism and the notable expansion of drone technologies across multiple applications.

• The building products sector continues to seek ever increasing demand, thanks in part to government investment in infrastructure and ever-increasing demand for the replacement of decaying infrastructure and property.

• The chemicals sector shows no signs of diminished M&A activity as global groups seeks to harness opportunities in the moves towards ESG and greener solutions.

• The flow control is as a robust as ever, with a strong focus on solutions for energy solutions such as hydrogen and LNG, as well as the ongoing demands of the water industry.

• The industrial equipment and machinery remains a mainstay of the overall industrial sector, with an increasing focus on new innovation such as automation and the arrival of equipment-as-a-service as a notable shift in supply models.

Ongoing specific M&A activity in industrial sectors is likely to be targeted on the move towards artificial intelligence, automation, cleantech, emissions reduction, ESG, industrial efficiency and net-zero. There is also an increasing tendency towards industry consolidation in industrial sectors, with smaller and medium-sized businesses being the ideal targets for larger groups. Corporate players are focused on acquisitions to gain access to new technology and service capabilities. They are also looking to create scale efficiencies through consolidation. At the same time, large groups are looking to build greater resilience into their supply chains.

Meanwhile, many large industrial groups are reviewing their portfolios and considering carve-outs and divestitures as they shift focus from growth to profitability and capital allocation. These disposals will free up new capital for investment into more profitable areas. Significantly, any supply chain disruptions will create the opportunity for more vertical integration, as industrial companies seek to secure access to key suppliers and raw materials. This in turn may result in an accelerating trend of businesses shifting into different sectors.

In terms of valuations in the industrial sector, the range of multiples paid for businesses can vary from anything between 6x and 10x EBITDA. Significantly, any players in the attractive growth segments of artificial intelligence, automation and digitalisation can attract valuations at multiples at much more than this.

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Constantine Biller is a Partner at Shaw & Co

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