Annual Industrials M&A Report – Middle Market Deal Activity and 2025 Outlook

Industrials M&A Gains as Industry Players Navigate Shifting Economy

Capstone Partners’ annual Industrials Industry M&A Report and 2025 Outlook report 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.

Government Spending Buoys Industrials Projects, U.S.-Focused Imperative Set to Bolster Domestic Manufacturing

The U.S. Industrials industry navigated a complex macroeconomic environment in 2024, shaped by evolving construction trends, Labor market dynamics, inflationary pressures, monetary policy adjustments, and geopolitical uncertainties. In 2024, the U.S. economy experienced a slight deceleration, with real gross domestic product (GDP) growing 2.8%, down from 2.9% in 2023. This moderation was primarily due to a slowdown in business investment, particularly in equipment spending. Despite this, consumer spending remained a strong driver of economic growth, with Personal Consumption Expenditure (PCE) Price index increasing 5.3% year-over-year (YOY) fueled by rising incomes and improving Labor market conditions. The midyear port strikes in key global trading hubs disrupted supply chains and led to higher transportation and logistics costs. These strikes caused delays in the shipment of goods, increased backlogs, and created uncertainty for industries dependent on imports, such as Retail, Manufacturing, and Automotive. As a result, many companies faced inventory shortages, production slowdowns, and increased costs, exposing the overall fragility of global supply chains. The slowdown in inventory accumulations and a decrease in imports partially offset positive contributions to GDP growth from government spending. Construction spending remained a key driver, rising 4.3% YOY to $2.2 trillion, with significant spending from the Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA) fueling demand for roads, bridges, and energy projects, according to the U.S. Census Bureau.¹

The Labor market remained tight at a 4.1% unemployment rate (a 0.3% rise YOY), but began stabilizing, with skilled labor shortages persisting in Construction, Engineering, and Manufacturing markets, according to U.S. Bureau of Labor Statistics (BLS).² Companies addressed this through training programs, automation, and technology, though wage growth remained elevated (up 3.8% YOY), according to the U.S. BLS.³ Increased union activity and immigration reforms could further shape the labor landscape in 2025. Inflationary pressures eased compared to previous years, but volatility in commodity markets and energy prices remained a risk. Industrials companies managed to protect margins by passing on higher costs to customers, though competitive pressures may limit further pricing power.

After a prolonged tightening cycle, monetary policy shaped 2024 with three interest rate cuts totaling -100 bps since September 2024. Institutional investors found opportunity in the carry trade of the Japanese Yen in the first half of 2024, borrowing at nearly a zero-percent interest rate then using the cash to invest in robust U.S. markets. With the Japanese Central Bank (JCB) raising interest rates and U.S. rates cutting, the bottom fell out and markets sold off in August, as Japan’s Nikkei 225 (TSE:N225) fell 12.4% to record the largest loss since 1987, with U.S. markets diving too. Ultimately, the Nikkei 225 closed the year 19.5% higher and the S&P 500 ended 23.3% higher. Lower borrowing costs are expected to stimulate investments in construction and capital equipment, though cautious lending practices may constrain smaller firms. A slightly weaker U.S. dollar is improving the competitiveness of U.S. industrials in global markets, offsetting some challenges from previous years.

Companies continued to navigate complex market conditions in 2024 and now face a volatile market with a new presidential administration. Nonetheless, the Industrials industry remained steadfast in seeking iron clad balance sheets and product diversification for M&A opportunities. Looking ahead to 2025, challenges such as labor shortages and inflation may persist, but the most pertinent, supply chain and trade war shocks are poised to disrupt global manufacturing. The volatility and changing political environment will require firms to remain agile. Companies with a U.S.-focused supply chain, or those that can serve as a domestic provider of commonly imported goods, stand to build business while the tariffs are in force. Those that invest in technology, sustainability, and workforce development will likely be best positioned to capitalize on emerging opportunities and navigate the evolving macroeconomic landscape.

M&A Volume Shows Early Signs of Growth as Valuations Moderate

The Industrials industry benefited from long-term growth drivers including government spending commitments for data centers, alternative energy production, industrial automation, and U.S. manufacturing projects. Private equity firms played an active role in the M&A market, leveraging uninvested capital to pursue platform and add-on acquisitions. However, geopolitical uncertainties, a strict regulatory environment, and supply chain disruptions continued to influence strategic decisions within the Industrials industry. Transaction volume increased 0.5% YOY from 1,643 deals announced or completed in 2023 to 1,652 in 2024. This compares to a five-year M&A average volume of 1,791—boosted by COVID-driven deal surges.

Strategic transactions commanded the majority (58.6%) of 2024 deals. Financial buyers prevailed despite difficulties securing debt financing and banks demonstrating caution underwriting large deals. Private equity buyers accounted for 41.4% of deal activity versus 43.7% in 2023. At the same time, sellers were slow to adjust pricing expectations, leading to a valuation gap that stalled transactions.

Industrials M&A experienced a shift in valuations, reflecting a dynamic interplay of market forces and bullish investor sentiment. M&A valuations fell compared to the prior year, averaging 9.0x EV/EBITDA. The Dow Jones Industrial Average ended the year at 16.4x EV/EBITDA, up more than a full turn from 2023’s average of 14.7x EV/EBITDA, with Engineered Products (18.1x) and HVAC (17.1x) capitalizing on upward market trends and finishing among the top of Capstone’s coverage areas. M&A pricing for high-demand segments buoyed the industry as sticky customer bases and accretive innovation transactions provided attractive opportunities for growth and diversification for acquirers. However, cyclical segments like Environmental Health & Safety (11.6x) and commodity-based manufacturing such as Metals (7.5x) and Chemicals (7.3x) faced pressure.