A Look Back: 2010 Manufacturing in Review

Looking back at 2010, the analogy of a first-time experience with parasailing comes to mind.

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You leave the turbulence of the boat only to feel the rush of reaching new heights, and as you start to take in the scenic views, suddenly you realize just how high and fast you've gone—in a little amount of time. As anxiety sets in, you realize that only a small rope prevents you from spinning out of control. But you look out to the beauty of nature surrounding you and your anxiety passes, and before you know it, you're back on shore with a newfound appreciation for stability and certainty.

We began our ride in 2010 with a rush in the first quarter. Companies in the industrial automation sector couldn't fill orders fast enough. The supply chain was stretched. The Dow zipped to more than 11,000—a level not seen since 2008—and by April 12, 2010, we had more than a 75 percent recovery since the lows of the prior year. Merger and acquisition (M&A) discussions thrived and capital markets were robust.

While it is difficult to pinpoint the moment that our attention began to turn to the sustainability of such a recovery, the popular question many corporate executives asked was: “Will there be a double-dip?” We began to worry about the oil spill in the Gulf, debt levels in Greece and the effectiveness of the stimulus package. A common indicator of fear in the market, the Chicago Board Options Exchange (CBOE) Market Volatility Index (or VIX), had reached more than 45 by May 20, a high not seen since early 2009. By the end of May, the anxiety around a possible second recession reached a crescendo.

While executives debated how sustainable growth was expected to be, the industrial automation and control sector saw a very strong rebound in demand for their products in 2010, from the lows of the prior year. As illustrated in the table, major world market indices have improved in 2010, including a significant increase of 26.4 percent in the Houlihan Lokey Industrial Automation and Control Technology Index (Houlihan IACT Index). Not surprisingly, the median enterprise value (EV)/latest 12 months (LTM) EBITDA multiple improvement for the group over the same period was 105.7 percent, going from 5.2x to 10.7x by March 31, 2010. (EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization.)

No garage sale

In the M&A market, traditional corporate acquirers never saw the expected great “garage sale” materialize in 2009, as attractive assets continued to command strong premiums. We have seen confidence returning to the boardroom, and industrial automation and control companies have, in many cases, strengthened already strong balance sheets as more cash built up and debt was paid down. Global M&A dollar values and volumes have risen by 38.8 percent and 29.2 percent, respectively, vs. the same period last year. Indicative of this increased transaction activity are the string of acquisitions by Ametek, including what we believe to be its largest acquisition ever, Haydon-Kerk, on July 1, 2010, for $270 million, and more recently, ABB's blockbuster acquisition of Baldor Electric for $4.2 billion, a 14 EV/LTM EBITDA transaction multiple.

From past experience, we have learned that recoveries are not linear. We expect that 2010 will be remembered as no different—a year of transition. From fantastic growth reminiscent of another decade to fears that, for a moment, reminded us of 2009, we will march into 2011 confident of one outcome: “Normal” will, once again, take on a new definition.

Global M&A Statistics1
YTD 11/30/09
YTD 11/30/10
% Change
Dollar Value ($bn)
$1,686
$2,341
38.8%
Volume
33,606
43,423
29.2%
Equity Performance
11/30/09
11/30/10
% Change
S&P 500
1,096
1,181
7.8%
DJIA
10,345
11,006
6.4%
MSCI World Index
1,149
1,194
3.9%
Automation Index2


26.4%
1 Source: CapitalIQ (2010 data preliminary estimates)
2 Index Includes: ABB Ltd., Actuant Corp., Curtiss-Wright Corp., Danaher Corp., Emerson Electric Co., Fanuc Ltd., Honeywell International Inc., Invensys plc, ITT Corporation, Parker-Hannifin Corp., Rockwell Automation Inc., Schneider Electric SA, Textron Inc, Yokogawa Electric Corp

Jim Lavelle
, JLavelle@HL.com, is a Managing Director in the Industrial Technologies practice, and Eugene Bazemore, EBazemore@HL.com, is Senior Vice President in the Industrial Technologies practice, at Houlihan Lokey, an international investment bank (www.HL.com).

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