The flow control industry is ripe for additional consolidation, according to a recent report from Jordan, Knauff & Co. (www.jordanknauff.com), a Chicago-based mergers and acquisitions (M&A) advisor that is active in the sector. Consolidation has occurred in the $146 billion global flow control industry during the past decade and the investment bank expects that this trend will continue. In a market characterized by fragmentation, acquisitive public companies and consolidation trends, there will continue to be merger-and-acquisition activity, says the report, titled “Industry In-Sight, The Flow Control Industry, Initiating Coverage.”
“It is our assessment that the three primary flow control categories—valves, pumps and filters—remain substantially fragmented, and that the dynamics of consolidation will continue to fuel M&A activity in the industry for an extended period of time,” says Jack Gonder, head of the firm’s Flow Control practice. The top five global valve companies account for only 9.6 percent of total valve demand, the top five filter companies account for only 15 percent of total filter demand and the top five pump companies account for 24 percent of total pump demand, according to the report.
M&A drivers
Jordan, Knauff cited a variety of reasons for its belief that global consolidation will continue in all three categories. Corporations continue to build cash reserves for acquisitions and recognize that a moderate economic environment will require strategic acquisitions to support growth. Private equity investors, with historically high levels of uninvested funds, continue to focus on the sector because of the appealing mix of highly engineered products, strong end markets, increasingly global reach and fragmented participant structure, with many companies manufacturing specialized products to specialized end markets.
Companies in the flow control industry have greatly expanded international scope during the last 25 years, the report points out, and customers are now demanding global suppliers with local service, support and market knowledge. Further, limited innovation and pricing pressure will continue to direct industry leaders to acquisition targets.
Go local
Lastly, according to the report, acquisitions are viewed more favorably than expansion (“Greenfield”) in order to gain local market knowledge and access to existing distribution channels, as well as existing customers. Both transaction and trading multiples demonstrate strong valuations with an increasing trend as the economy emerges from the economic crisis, Jordan, Knauff said.
