Joshua Rosenbaum 00:06
Hello and welcome to Strategic Alternatives, the RBC Capital Markets podcast, where we uncover new ways to raise capital, drive growth and create value in an ever changing world. I'm Josh Rosenbaum, Global Head of Industrials at RBC Capital Markets, and your host for today's episode. We are joined today by the Global Heads of three key sectors for RBC Capital Markets. Cliff Bayer, who covers Aerospace, Defense and Government services, George Murphy, Industrial and Commercial Services and Gaddy Cohen, Capital Goods and Industrial Technology. It's great to be speaking with all of you fresh off our Global Industrials Conference for what has been an energizing two days of sector-wide discussion with over 800 attendees, 105 participating companies and key market participants joining us here in New York. With that backdrop, let's dive in.
Well Cliff, I'm going to start with you, and then I'm going to pass it over to Gaddy and George, but we'll ease into it. How would you describe the overall mood on the ground at the conference for your key clients?
Cliff Bayer 01:16
Morning, Josh and everyone. It's a pleasure to be here today. Yeah, I would say overwhelmingly very positive. Just to bifurcate the markets in between commercial and defense. On the commercial side, it's been a very strong season. The summer season is typically the highest grossing season for the airlines, momentum has grown over this peak season, with July demand reaching about 4% or 5% growth. That trend appears across all regions and is particularly evident in the international travel market, which strengthened significantly over the summer. The RBC North America commercial supplier index is up about 42% year over year. On the defense side, it's actually an even better picture than on the commercial front; we're looking at a defense budget in 2025 approaching a trillion dollars, and that's up from about 875 billion in 2024. The North America RBC defense supplier index is up about 86% year over year. The European defense index is up about 95% and a lot of that is growing, as relates to just the growing presence in NATO membership, increasing their level of defense spending across the board. That level of spend is increasing significantly to about three to 5% of global GDP. So we're seeing a massive influx of defense spending in Europe, and the public market share prices and multiples reflect that.
Joshua Rosenbaum 02:46
Great. Thanks, Cliff. Gaddy, what are you seeing in Diversified Industrials and Capital Goods?
Gaddy Cohen 02:51
I would say, from a macro backdrop perspective, companies describe the industrial macro as challenging but steady. No one reported significant deterioration, but residential construction remains weak while municipal budgets are healthy. I would say that data centers stood out as the strongest growth vertical offering multiyear visibility for the suppliers that addressed that end market. Schneider was one of the keynote speakers on the first day of the presentation, and I think a majority of the early questions in that presentation were focused on trying to understand the data center trends and how long that demand is going to persist for a company like Schneider, which sells a lot of electrical and cooling products into data centers. I'd say tariffs was another persistent issue that came up. Most companies reported they are managing effectively through supply chain adjustments and pricing actions. A lot of companies talked about end market for market and also being able to address some of the pricing issues related to tariffs. Companies generally understand the tariff costs. Customers understand the tariff cost dynamics and pricing has been sticking as manufacturers have been addressing that issue. Lastly, many management teams emphasize that short cycle industrial businesses are stabilizing and returning to normalized level now that there has been more clarity on policy in the United States, but everyone emphasized that there's still some lingering uncertainty with all the macro changes.
Joshua Rosenbaum 04:34
George, would be great if you could build on that related to Industrial and Commercial Services.
George Murphy 04:39
Moving into the back half of this year, there's a lot more bullishness on the part of investors as well as on the part of companies, as they've continued to focus on some of these key themes. So AI data center, power generation, electrical transmission investment required by utilities, reshoring of companies, industrial plants and facilities in the U.S. or technology, some of these big projects that that you've seen announced from the semiconductor side, from the, technology side, pharmaceutical side, et cetera. So there's a lot of excitement, on the part of the key players in this market and investors. There's an expectation that you're going to see a lot more infrastructure investment, in the U.S. over the next several years. And you look at their share price performance and their current valuations, I think that reflects investor bullishness in the markets.
Joshua Rosenbaum 05:32
We're just a few minutes in, and we've already gone there on AI. And while this was an Industrials, not a Tech conference, clearly, all the names in the Industrial space certainly very focused on tech and AI. Why don't we talk about that in a little more detail? Cliff, I'll come back to you and specifically what you're seeing with AI within Aerospace, Defense and Government Services, Gaddy and George, then I'll let you chime in.
Cliff Bayer 05:57
It's definitely a big topic, and the change is pretty significant and very quick. I would say on the defense side, it's really transforming the military and defense sector by things like enhancing battlefield decision making, intelligence analysis, and cyber defenses. Really just overall leading to an increased level of operational efficiency and just overall strategic advantage. On the commercial side, it's probably being more utilized by airlines than the OEMs; and the airlines are using AI to just enhance customer experience, flight scheduling, and they're also exploring somewhat controversial applications of AI for dynamic flight pricing. The rate of change is just so quick in that sector, I think it's going to have pretty big impact in how airlines do business.
Joshua Rosenbaum 06:47
Understood. Gaddy, how about you?
Gaddy Cohen 06:50
Yeah, so several companies explicitly link their strategies to AI and related technologies. For example Honeywell’s vision includes creating autonomous buildings and factories with AI-enabled controls positioned as a key value proposition to its customers. Data center and infrastructure players obviously tied AI demand to growth and several companies like nVent, Schneider, and others, talked about capacity expansion for liquid cooling systems that support Nvidia's GPUs in hyperscale AI workloads. A lot of companies also address labor and capacity challenges and how they're using AI-driven data centers to improve efficiency and maintain or improve margins. So also, away from just products to address AI, a lot of companies talked about addressing labor and capacity challenges with AI tools, which was a positive.
George Murphy 07:48
The Customer project opportunity that that's been created by AI. That's an opportunity for the big engineering firms that are either working with the hyperscalers or the technology companies to ultimately design construct technology infrastructure, data center infrastructure, also with the utilities to help them design new power generation and/or transmission infrastructure. I'd say the second component is how they are utilizing AI to make their businesses more efficient. There's uses of AI, from the ability to work on RFPs and make contract reviews and project tracking much more efficient. So I'd say it's early days, but there's a revenue opportunity there in terms of the infrastructure that will be needed to ultimately power the continued growth in AI, but then how AI can be used as a tool to help them run their businesses more efficiently.
Joshua Rosenbaum 08:46
Clearly we're hearing from companies that there are macro challenges and crosswinds, but at the same time, based on what you guys are saying, there's clearly some very exciting growth themes out there. So I think that's a great transition to dealmaking activity. Why don't, George, I start with you, and then we'll hand it over to Gaddy and Cliff.
George Murphy 09:07
M&A has been a key driver of growth for the big engineering firms for many years now. As I mentioned before, a lot of optimism and bullishness around the outlook for infrastructure investment, in the U.S. and there's an expectation that there's going to be a reacceleration of growth. And as a result, the share price performance has been very strong in the sector. And I think most of the management teams that I talk to are bullish on their businesses, bullish on the opportunities, believe that fully be able to access these growth opportunities, they will have to do strategic M&A that will enable them to give them the capabilities and exposures that they need. There's also been a lot of private equity experience and investments in the sector, who are looking to, frankly, benefit from the same mega trends, infrastructure investment, energy transition and an investment environmental sustainability, etc., that public investors are trying to benefit from as well. Most of the companies I talked to, their M&A pipelines are pretty full right now, across the gamut of small deals and potentially larger deals. I'd say this is probably the best M&A market in this sector, the 20-plus years I've been covering the sector, that I can recall.
Joshua Rosenbaum 10:21
No, clearly, the services sector, corporates and private equity has been incredibly active. I'd say across, most areas of industrials, it's similar, probably tilting a little more understandably, given interest rates and some of the macro outlook, tilting more towards corporates. But Gaddy, be great to hear what your clients are saying.
Gaddy Cohen 10:41
I would say the tone around M&A is constructive but disciplined. I'd say most companies stress their focus on bolt-on deals over transformational ones. Some highlighting that the careful integration and a focus on accretive returns is their core goal, Some companies did highlight that they have now reached their leverage goals. And now that the balance sheet is in great shape, they are looking to be more aggressive from an acquisition perspective. Within data centers, I'd say most companies are looking for acquisition opportunities to better address that core growth expectation in that market.
Joshua Rosenbaum 11:22
Cliff, Maybe any specifics with regards to companies or sub verticals within broader AMD?
Cliff Bayer 11:30
We're seeing a very robust M&A market in the aerospace and defense markets right now. Just to put it in perspective, over the last 12 months, there's been about 50 transactions that have been 50 million of enterprise value or higher, 12 transactions a billion dollars or higher, and one transaction that's been that's over 5 billion and that, that was the sale of Jefferson out of Boeing to Thoma Bravo. There's probably three areas within aerospace and defense that are very active right now. Number one, aftermarket. So really, anything that's touching the services space as the aircraft OEMs and the engine OEMs struggle to match demand, assets are being used longer and being used harder, so that just fuels a lot of the aftermarket growth, what we're seeing right now. The second is defense technology, and the third area that we're seeing a lot of growth in is just in the space industry. So as that market grows, and there's just more third party capital coming into this into that sector, you're seeing a lot of M&A and a lot of consolidation. So overall, it's been it's been very positive, and we have seen private equity come in and make some really bold moves. And for many private equity groups, it's their first entry into the space. So just picking names like HIG acquiring company called STS, Bain has made some fairly big moves in the space as well. Traditionally they haven't been a big investor in the sector. So it's a very exciting time in the space right now.
Joshua Rosenbaum 13:03
All right, let's, let's run with this dealmaking theme and grab our passports, take it cross-border. And Cliff, I'll start with you.
Cliff Bayer 13:12
That's a great question, and very topical. July, while we reached a tariff agreement with the EU, which included a 15% premium charge, there was an agreement to essentially give aircraft and related parts a pass on tariffs. And between the U.S. and Canada and the U.S. and Mexico, there's also been some resolution on that as well. And you’ve certainly seen that in the public trading valuations that that has taken a bit of level of uncertainty out of the market, but you haven't really seen a lot of cross-border transactions because of some of that uncertainty that that was in the marketplace earlier this year. There have been some we worked on the sale of a company called LMB to Lore. The seller was a French company. The buyer is a U.S. company. And just to put it in perspective, that was announced in February, and here we are in September. We're still waiting on approvals for that. But I do expect that to return to more of a normalized course as the tariff uncertainties go away.
Joshua Rosenbaum 14:14
Yeah, I would just add that for a number of companies that I spend time with at the conference, particularly within building and construction, one overarching cross-border theme is that still the U.S. is where the action is. So for people that are in the U.S. very much want to continue investing in the US. I'd say the standards are much higher to allocate any incremental capital outside of the US than I'd say North America more broadly. Definitely people looking, but the standards are high and the strategic basis has to be very strong. Gaddy, what about your clients?
Gaddy Cohen 14:53
So from an operating perspective, I think local for local has been a pretty significant focus. From an M&A perspective, I agree with your comment, Josh, we are seeing a lot of interest inbound into the U.S., and most of the cross-border activity that we're seeing is really European companies acquiring in the U.S. Siemens, as an example, has made several acquisitions with a particular focus on industrial software with the acquisition of Altera engineering last year and then earlier this year of Dotmatics, really coming inbound into the U.S. market to capture the growth in the market, but also looking for talent and greater trends in software.
Joshua Rosenbaum 15:40
And George, how do you see cross-border considerations and allocation of capital playing you’re your industrial services clients?
George Murphy 15:47
The U.S. is the biggest, most attractive market right now. I'd say one, two recent deals that WSP had done – WSP, the big Canadian, Montreal-based engineering firm – they had bought a business called Power Engineers a little bit over a year ago in the U.S., privately owned business, sizable business. They also did another acquisition just a few months ago, acquiring a company called Ricardo PLC, which is a UK-based public company. RBC actually advised them on it. It was a 600-plus million dollar deal. So they are still looking internationally, but I think a lot more interest on the part of U.S., Canadian and European firms investing in the U.S., just given the attractive outlook for the U.S. market versus some of the other markets right now.
Joshua Rosenbaum 16:33
Absolutely, very consistent across all verticals within industrials, the desire to buy companies, quality companies in the U.S. So let's shift gears a little bit. Our conference was obviously focused on public corporates, but private equity, always, since the beginning, has been very active in industrials and continues to do so. George, let's start with you, because services, I'd say, if not at the very top, certainly near the top of those sub verticals, industrial services has seen a ton of private equity interest and activity. So let's start with you.
George Murphy 17:12
Yeah, I think that's absolutely the case. And I think it's it's for three main reasons. The first reason is, the outlook in the U.S. is, is pretty positive right now, from an infrastructure investment growth perspective, especially compared to other markets. Two, the services sector, these are all very fragmented markets ripe for consolidation. So a private equity firm is interested in obviously focusing on businesses and markets where there's good organic growth. The sub verticals within services, lots of small private players, and so, an opportunity to actually augment and turbocharge the organic growth through inorganic growth, through acquiring at lower multiples, smaller private businesses. Buying a business in a good organic growth market that has good fragmentation and opportunities to really turbocharge growth through M&A, and then being able to invest in technology and resources to make those businesses more efficient and drive higher margins and and even higher growth is a key theme. It's been, across the board, a very, very active market in the services world over the past several quarters. And I certainly expect that to continue.
Joshua Rosenbaum 18:26
Gaddy, what are you seeing with private equity amongst diversified industrials. Love to hear your thoughts on the state of play today.
Gaddy Cohen 18:34
We've seen a lot of private equity investors look to put capital to work in two core themes. One is around carve-outs, so non-core assets of large industrial businesses that have shifted their focus and strategy over the years. I would say in the capital goods space, most publicly traded companies were trading at levels that were above where a take-private made sense. But over the last six to 12 months, as companies have experienced some of the headwinds that we talked about earlier, tariffs, operational inefficiencies and things like that, certain public companies have not been able to perform well, and they've become interesting opportunities for private equity players to pursue take-private strategy, improve the operations, change the strategy of a company that struggled in the public markets. Apollo, earlier this year, acquired Barnes, which was a was a publicly-traded company. It's a business that was highly diversified. We anticipate more take-private opportunities as these certain public companies don't perform in the public markets, which creates an opportunity for private equity to step in.
Joshua Rosenbaum 19:54
We're definitely seeing private equity activity within broader industrials pick up. Cliff, you've had a very active year in aerospace and defense. Be great to hear your thoughts.
Cliff Bayer 20:04
Private equity, they generally represent anywhere from 30 to 50% of total deal volume in aerospace and offense, and I think that is, I think their level of activity is just going to continue to increase. I mentioned Bain earlier. We also saw a very interesting transaction this past year with Stone Peak, which has traditionally been an infrastructure fund, acquiring a company called Forgital which focuses on forgings for the commercial and military engine market that was about 1.5b enterprise value in terms of euros. So I do think that we'll continue to see more first-time private equity buyers enter the sector, just because the trends are so favorable. And I'm not sure we're going to see a lot of take-privates because the public market valuations just continue to go up. And there's, frankly, not that not that many interesting take-privates at this point. But I think we'll certainly see a lot of private activity. And, one of the areas that I think we're going to see a lot of activity over the next 12 months is really investing in suppliers that are that are weighted towards the OEM supply chain. So now that Boeing and Airbus are working through some labor issues that they've had coming out of the Covid pandemic, and working through some supply chain issues that they've had, they're raising production rates and we're starting to see that happen now. So I think companies that are weighted towards those production rates, OEM-focused manufacturing companies are going to be very, very active over the next 12 months in terms of M&A activity, so it'll be interesting to see.
Joshua Rosenbaum 21:45
I think we're starting to see the signs of, hopefully, a constructive IPO market for industrials companies. So obviously, as private equity considers exits, I think the IPO option is becoming increasingly viable. That being said, it's a very strong corporate market. One of the big deals we worked on this year in industrials was the sale of a private equity owned business, Foundation Building Materials owned by American securities and CDN are to Lowe's. And that multiple and that price work for the private equity owners. So we are seeing exits to corporations, but we're very focused on seeing the IPO exit come back. Although it has had life in certain sub pockets of industrials, it hasn't been as broad based as it has been in years past. So I'd like to pivot as we kind of come kind of wrap this up, George, in terms of, overall advisory themes, obviously, we, as investment bankers that cover these large sub verticals and industrials, we're thinking all the time about how we can help our clients. Be great to hear from you in terms of broad themes that you're thinking about for your clients in terms of advice and outlook.
George Murphy 22:59
The outlook is strong. There are probably more buyers than sellers. So if you have a business in these markets, now is an interesting time to contemplate a sale, because there's a lot of strategic interest or buyer interest, whether it's from corporates or from private equity firms. I think we're, we're in the early innings of what I think is going to be a very active and very interesting M&A market where people are utilizing M&A, whether it's companies or private equity firms, to get exposure to some of these large, sustainable, mega trends that we see out there. At the same time, if you are a buyer, I'd say the level of sophistication on the part of corporates that I that I work with, has increased significantly over the past number of years, and I think a greater willingness to look at the future and think about synergies and think hard about how to create greater shareholder value and potentially be more aggressive building your business. And I think, as a corporate, if you have a good strategic plan, if you're if you're thoughtful and willing to do intelligent M&A, I think the markets are very supportive.
Joshua Rosenbaum 24:08
With regards to deal making appetite and activity, we have a pretty interesting environment. As noted a couple of times in this episode. Obviously, the macro visibility, you know, may not be perfect, but it rarely is, and frankly, whenever it is, that's subject to change within months and certainly quarters. But what is interesting today is that it's a very strong financing environment. On the debt side, you know, for public corporates, their equity generally, is valued quite well today. So it's a strong currency, and then the other factor is the regulatory environment with regards to antitrust. And while it's early in the new administration, there's a perception and a small track record, as I said, it's early in terms of the environment being more receptive to some deals getting done, that maybe the players had been waiting for a while to kind of assess that situation. So it's yet another dynamic out there, which I'd say on the ledger of favorable, unfavorable tilts towards favorable in terms of getting deals done.
Joshua Rosenbaum 25:18
Gaddy, anything to add?
Gaddy Cohen 25:19
Yeah, so a lot of the companies we spend time with are looking to continue to rationalize their portfolios where large corporates have not focused on in terms of growth and investment. This is a great time to be selling those businesses, given the financing markets and valuations. And then it's better for most of these corporates to redeploy those proceeds from the sale of those businesses towards acquiring higher growth businesses that are addressing the themes that we talked about, or to reduce leverage. One core theme that we did here throughout the sessions is companies focus on the right capital allocation and maintaining leverage levels that are, below where they've been historically. In the universe of companies that we cover in capital goods, a lot of businesses are viewed as industrial compounders. These are companies that have great organic growth, GDP-plus type organic growth, but also amplify that growth with M&A strategies that have been proven to work year in and year out, where they add to the organic growth, but also provide an opportunity to drive operational improvement, to drive synergies, to enhance the margin profile. So overall, I'd say the tone was very positive, and companies are looking to focus on capital allocation and drive growth that way.
Joshua Rosenbaum 26:50
And Cliff?
Cliff Bayer 26:51
I mean it is a very constructive backdrop, both from a financing perspective and then just from a liquidity of buyer perspective. So for companies that are looking at selling, this is a very constructive market to do that in. We are encouraging clients to take another quarter before they do that, because many of our clients, have very strong, robust growth year over year. So getting 2025 completed, and then looking at a sale in Q1 or early 2026 is probably prudent, just given the level of growth that they're seeing over the course of the year. We are still a bit cautious on public corporate transactions that involve some antitrust scrutiny, just because I don't think we've seen many transactions, large transactions that have happened that have gone through that process unscathed. So I do expect to see a lot more activity over the course of the next 12 months, and activity that's probably skewed more towards private equity than corporate than has been in in the historical timeframe.
Joshua Rosenbaum 27:58
Yeah, that's interesting. So I guess, from a tactical standpoint, for companies that are showing good year over year growth clearly, waiting until there's a greater ability to sell off of 2026 performance makes a ton of sense. So with that, I'd like to thank you all for your insight. Very interesting conversation today, interesting to see some of the similarities as well as the differences across themes.
For our audience, you have been listening to Strategic Alternatives, the RBC Capital Markets podcast. This episode was recorded on September 22, 2025. Listen and subscribe to Strategic Alternatives on Apple, Spotify, or wherever you listen to podcasts. If you enjoyed this episode, please leave us a review and share the podcast with others. Thank you very much.
DISCLAIMER: This content is based on information available at the time it was recorded, and is for informational purposes only. It is not an offer to buy or sell or a solicitation, and no recommendations are implied. It is outside the scope of this communication to consider whether it is suitable for you and your financial objectives. For disclosures, please visit www.rbccm.com/disclosure