Published October 16, 2023 | 3 min read
Key Points
- After two years or suppressed activity, appetite for M&A among industrials is high, despite the cost of financing.
- A series of notable divestitures, including DuPont and Ball Aerospace, signal increased activity.
- Corporates with strong balance sheets are considering transformative or opportunistic moves to achieve growth.
- The picture is complicated by the continuing demand for labor and its associated costs, as well as major redesign and onshoring of supply chains.
Healthy corporates are poised for deals
Vito Sperduto: If we think about the M&A market this year, the first half was basically equivalent to what we saw in the second half of last year, with volumes significantly depressed. We were expecting an uptick in the second half of ’23. It’s starting a bit slower than we were anticipating, but we are seeing some green shoots.
Josh Rosenbaum: Yes, people do want to do deals. In terms of the macro picture, the fear of the apocalypse has been removed. But we’re still dealing with higher rates. That means a higher cost of financing, which impacts buyers’ ability to pay. But people are adapting to new interest rates, and I think that bodes well for getting deals done.
Larry Grafstein: The industrial sector covers such a broad spread of industries. Do you feel they are being uniformly affected, and is there a general consensus about their degree of confidence not just in deal making but in the economy generally?
Rosenbaum: Auto and EV is its own ecosystem. Putting that to the side, I’d say all sub-verticals and industrials are hanging in there, whether it’s building products and construction, chemicals, packaging, aerospace and defense, transportation and logistics. Industrials generally have healthy performance and balance sheets. The issue is just the cost of financing, which for years was 5 to 5% and now may be 8 to 10% or greater.
Sperduto: Over the last two or three years, we’ve seen so many of our clients be inwardly focused. I think they’re probably as clean as we’ve seen them in some time, in terms of the strength of their business. It does feel like there’s a pent-up demand where they’re ready to transact.
“Corporates are probably as clean as we’ve seen them in some time, in terms of the strength of their balance sheets.”
Vito Sperduto, Co-Head, Global M&A, RBC
Divestiture deals suggest the way forward
Rosenbaum: On the buy side, corporates all say they’re open for business and looking to buy attractive assets. I think they’re willing to be opportunistic and bet on their business for the long term – it just comes down to the cost of that financing and availability.
There have also been some notable divestitures, which I think is a really bullish sign. We’ve just helped a private equity firm buy an asset, Delrin, from DuPont – pure corporate divestiture to thread the needle. Another notable deal was a major divestiture out of Ball Aerospace.
Sperduto: Yes, BAE was the winner of that auction. That’s an asset that has been coveted for some time. We always say good premium assets will have a market; that one certainly did.
Acquisition as a tool for growth
Rosenbaum: Recently RBC was the sole advisor to Saint-Gobain in its acquisition of Building Products of Canada, a $1 billion deal in the roofing space. Saint-Gobain was able to use cash on hand. That convinced the seller that private equity couldn’t be competitive, and frankly nor could other corporates that didn’t have that kind of cash lying around. So it’s a really good environment for large corporates with that kind of balance sheet capacity.
Sperduto: It highlights that a lot of our corporate clients who’ve done well by their balance sheet can consider transformative or opportunistic M&A. One of the things I’m seeing a lot is talk of specific acquisitions to bolster growth.
Rosenbaum: Typically the three highlighted capital allocation areas are organic, buybacks, and accretive M&A. Corporates have been playing more of the buyback and organic growth arrows from their quiver; I think they’d like to ramp up M&A.
Sellers need to be willing to sell – and if they and their advisors are being more honest, in some cases maybe their expected prices have to come down, especially if it’s geared towards PE. If corporates deem it strategic and they have cash on hand and a cheaper cost of capital, they could stretch more.
“It highlights that a lot of our corporate clients who’ve done well by their balance sheet can consider transformative or opportunistic M&A. One of the things I’m seeing a lot is talk of specific acquisitions to bolster growth.”
Vito Sperduto, Co-Head, Global M&A, RBC
The impact of labor and supply chain changes
Grafstein: United Auto Workers are immersed in a contentious discussion with the big automakers, and we know that there’s wage pressure from the inflationary environment. How might these pressures, as well as supply chain issues, affect M&A?
Rosenbaum: We have low unemployment and high demand for workers. There’s no doubt there are pressures across the board in industrials to find and train sufficient labor. The flip side is obviously those costs have to be accounted for.
On supply chain and onshoring, people are planning not for a year or two, but for what could be decades in terms of the new geopolitical normal. That means real costs associated with redesigning supply chains, onshoring facilities and supply sources. Associated with that is the labor that will be needed here in the US, versus places where there was cheaper labor or cheaper costs.
Sperduto: This is probably the most variability I have seen in over three decades. We had such a peak in ’21, in terms of activity and businesses flourishing, then such a drop. Now it’s steadily coming back. Our anticipation is that ’24 is going to be a very strong year from a business climate perspective, but also from a transaction perspective.
Rosenbaum: There’s been almost two years of relative dormancy, and I think there is a tremendous backlog of pent-up demand. Over my career, even in the toughest periods, you really haven’t seen these markets closed for more than a couple of years. When we get into Q1 of ’24, it will have been a couple of years – and just talking to people, there’s so much appetite out there.
“People are planning not for a year or two, but for what could be decades in terms of the new geopolitical normal.”
Joshua Rosenbaum, Global Head of Industrial and Diversified Services, RBC
