Annual Industrials M&A Report – Middle Market M&A Activity & 2024 Outlook

Industrials M&A Demonstrates Defensibility Amid Macroeconomic Headwinds

Capstone Partners’ annual Industrials Industry M&A Report and 2024 Outlook examines public market valuations, macroeconomic trends, and deal activity driving sectors within the Industrials space. Capstone Partners’ Industrials Investment Banking Team provides merger and acquisition (M&A), capital formation, and financial advisory services to the owners of middle market businesses in the Industrial and Manufacturing industries. Our team partners with leading mid-to-large sized industrials and manufacturing businesses that serve growing end-markets. We ultimately look to work with companies that manufacture highly engineered products and differentiated services with an entrenched competitive position.

Manufacturing Resilience Sustains U.S. Industrial Production

Financial markets and U.S. business owners are hopeful that the Federal Reserve has guided the U.S. economy to a soft landing with interest rate cuts on the horizon. Manufacturing demand fluctuated with the January Manufacturing PMI rising 2.0% compared to December, indicating market contraction, meanwhile new orders grew 5.5% indicating strong end market demand and a robust overall economy, according to a report by the Institute for Supply Management¹. Despite volatility in the markets and input price fluctuations, the Industrials industry proved to be recession-resilient in 2023 with many subsectors outperforming the Dow Jones Industrial Average year-over-year (YOY). Gross domestic product (GDP) rose 3.3% in Q4 2023 compared to a 1.9% increase in the prior year, while manufacturers’ new orders rose 2.3% YOY, according to the U.S. Bureau of Economic Analysis and U.S. Census Bureau^2,3. Additionally, services held up well as the Producers’ Price Index (PPI) for final demand services grew 2.8% YOY, according to the U.S. Bureau of Economic Analysis.

Inflation trends have cooled but are likely to remain above the Federal Reserve’s 2% target in the near term, while labor markets have normalized, with unemployment rates remaining steady YOY at 3.7%. The Housing market stalled in 2023, as housing starts fell 8.8% YOY, and existing home sales decreased even more (-19.3%) as outsized mortgage rates and borrowing costs sidelined buyers, according to the U.S. Census Bureau and National Association of Realtors (NAR)⁴. Activity in the Housing sector is expected to rebound as rates fall, and pent-up demand for products and services is forecasted to materialize and drive innovation in the Industrials space, therefore stimulating M&A markets in 2024.

Changing global dynamics such as geopolitical uncertainties, supply chain disruptions, and the increasing impact of technology and innovation have prompted many companies to reconsider their manufacturing strategies. As these risks are weighed and the cost benefit shrinks, manufacturers have begun reshoring their networks, bringing back manufacturing capabilities to the U.S. The Inflation Reduction Act (IRA), enacted in response to rising concerns about foreign risks and inflationary pressures, represented a significant policy development in the economic landscape of the U.S. While the primary objective of the IRA was to mitigate inflationary risks and stabilize the economy through targeted fiscal and monetary measures, it also provided significant tax and other incentives to numerous Infrastructure- and Manufacturing-related sectors. Suppliers have felt the aftershocks of pricing volatility as input costs and commodities fluctuated and supply constraints were mismatched with demand, resulting in a drop-off in volume. The U.S. has recognized the ability to reduce dependence on foreign supply chains, bolster domestic job creation, and foster innovation closer to home through the reshoring of manufacturing networks, which in turn is expected to support the Industrials space in achieving future self-sufficiency.

M&A Volume Moderates, Valuations Remain Steady

Elevated interest rates, macroeconomic uncertainty, and wavering seller sentiment dampened Industrials transaction activity in 2023. Industrials industry M&A volume declined 15.4% YOY. Transactions closed by strategic buyers fell 18.3% YOY but continued to command the majority (56.4%) of deals. Financial buyers increased their presence in the space, accounting for 43.6% of deal activity versus 41.6% in 2022, highlighting the sponsor appetite for companies with strong revenue visibility.

M&A valuations in the Industrials industry remained steady compared to the prior year. Sectors that have been heavily impacted by rising interest rates and commodity price fluctuations, struggled throughout the year. Non-cyclical sectors less dependent on economic activity held up well (discussed in detail in the full report below). In 2024, Capstone’s Industrials team anticipates a rebound in M&A demand for quality companies which will serve to bolster valuations.

Public market valuations in the Industrials industry for 2023 were relatively muted to begin the year, as interest rates rose, and the prospect of a hard landing caused a continued pullback. By Q3 2023, public market valuations ticked up to 11.3x EV/EBITDA from 10.9x in Q2 and normalized by the end of Q4 to 11.1x as activity picked up and uncertainty around the health of the economy abated. Higher rates forced companies to shift their focus to debt reduction rather than acquisitions as a heightened rate environment persists.

Industrials M&A Activity Trends by Sector

The full report, available for download below, includes M&A commentary and analysis on nine key sectors within the Industrials industry:

• Chemicals
• Engineered Products
• Environmental Health & Safety
• HVAC
• Industrial & Environmental Services
• Metals & Metals Processing
• Packaging
• Precision Manufacturing
• Waste & Recycling

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Request instant access to the full Annual Industrials M&A Report – Middle Market M&A Activity & 2024 Outlook for a deep dive on activity across nine key industry verticals, including sector M&A deal volume and average purchase multiples.