A Buyer’s Perspective on Automation Investing

April 21, 2023

The past decade has seen growing consolidation within the automation market, even during the pandemic. There are many reasons for this robust mergers and acquisitions (M&A) activity, and the resilience of and growth opportunities within the automation market only help to fuel this trend further.

Owners of automation technology firms tend to be receptive to buyer interest and the lucrative business valuations that are being offered by buyers, but they are also asking: Why our industry?

To help explain our perspective on investment activity in the automation technology market, let’s first look at the reasons for the automation market’s M&A activity from a buyer’s perspective. My next column will focus on the seller’s point of view.

To start, it’s helpful to understand that there are two types of buyers driving the automation market consolidation trend: strategic (i.e., industry) and financial sponsor (i.e., private equity, family office, or other investment funds). Examples of strategic buyers include Actemium, GrayMatter, and Dorsett Technologies, and examples of financial sponsors focused on the automation sector include MiddleGround Capital, LFM Capital, and Carlson Private Capital.

There are numerous reasons why investors are flocking to the automation sector. The three main reasons involve positive perceptions around growth, consolidation opportunities and quality.

A clear growth market

The global industrial automation market was valued at $205 billion in 2022 and is projected to grow to $395 billion by 2029. This increase represents a compounded annual growth rate of 9.8% (source: Fortune Business Insights’ 2021 Industrial Automation Market Size, Share & COVID-19 Impact Analysis).

In addition, automation sub-markets, such as automated material handling systems, control systems integration and mobile robotics, have demonstrated strong demand from industry end users. As evidence of this, J.P. Morgan’s February 16, 2023, “Automation Industry Report” indicates that approximately 88% of control system integrators recently surveyed anticipate growth in demand for automation technologies and related services over the next 12 months.

Growth industries are attractive to buyers, and the automation segment’s projected bright future provides buyers with the proper investment foundation.

Consolidation opportunities

Financial sponsors and strategic buyers are always looking for ways to grow through acquisitive or inorganic means. Add-on acquisitions provide a seasoned buyer with numerous opportunities to generate a return on investment. Such opportunities include:

  • Potential synergies when the platform company acquires complimentary add-on firms. 
  • Add-on acquisitions typically require a relatively lower capital outlay than a platform acquisition, resulting in a lower risk transaction for the buyer.
  • There are a significant number of existing platforms within the automation industry, offering the market a broad range of potential buyers seeking inorganic growth. Coupled with the fragmented nature of the automation segment, a fertile base is created for consolidation.

Flight to quality

Investors focus on protecting their capital and naturally gravitate towards recession-insulated industries. Although market dislocations create uncertainty, automation is considered by most buyers to be a safe haven for investment. A primary reason for this perception is that many automation companies continued to perform and grow throughout the pandemic.

Clayton & McKervey, a CPA firm focused on working with industrial automation business owners to grow their businesses, has witnessed the automation market’s positive growth—even in difficult economic conditions—within the firm’s client base. Bryan Powrozek leads Clayton & McKervey’s industrial automation services team and seen the demand for his clients’ services, as well as interest in acquiring their businesses, continue to increase in recent years.

“Beyond the pandemic, automation is viewed as a solution to many challenges facing manufacturers,” Powrozek said. “Shortages in the labor force, reshoring and the ability become more agile will all be addressed in part by automation. As a result, we are seeing the demand for automation increase and don’t expect that to change any time soon.”

Bundy Group is a boutique investment bank that specializes in representing controls and automation, Internet of Things, and cybersecurity companies in business sales, capital raises and acquisitions. You can learn more at www.bundygroup.com or by contacting Clint Bundy at [email protected]. Bundy Group Securities, LLC, is a registered broker-dealer and member of FINRA and SIPC. This content is for informational purposes only and is not intended as investment advice or a recommendation to buy or sell any security.

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