Recent articles in this column have focused on the causes, immediate consequences and likely long-term effects of the credit crisis, particularly in regard to the automation industry. Several predictions emerged: (i) large financial institutions would make significant write-downs due to mortgage exposure; (ii) private equity firms and hedge funds would no longer be able to take advantage of low-cost leverage to execute the rich deals seen over the last few years; and (iii) the automation industry, while still affected by the downturn in merger and acquisition (M&A) activity in the larger market, would continue to flourish as cash-rich companies pushed ahead with significant M&A activity throughout the sector.
A careful look at the casualties of 2007’s credit crisis and new automation industry M&A figures from the beginning of 2008 suggests these predictions were correct. Banks and financial firms took the blows many had foreseen over the last few months, but only when fourth quarter results were released was the scale of the damage apparent. In the second half of 2007, these firms booked or announced more than $45 billion in write-downs tied to the decline in value of mortgage-backed securities and corporate-buyout loans, and as expected, several deals orchestrated by heavily leveraged buyers hit snags. Overall, of the 20 largest M&A transactions announced between August of 2007 and February of 2008, only three involved a private equity firm.
Luckily, the third prediction has also proved correct—the automation industry, particularly with regard to M&A activity, has continued its robust activity in 2008, buoyed by aggressive strategic acquirors. When contrasting 2007 and 2008 for the period Jan. 1 to mid-February (when this article went to press), the worldwide overall M&A market has significantly lagged. Closed deals numbered 5,282 during this period in 2007 and have dropped 45 percent to 2,923 in 2008. In the automation industry, while the reduction in number of deals is only a bit less severe, dropping 41 percent from 232 in 2007 to 138 in 2008, total deal value and average deal value (see table) have risen. In the overall M&A market, total deal value fell 35 percent from $439 billion to $284 billion, while total deal value across the automation sector for this time period is an encouraging $16 billion—a surprising 7 percent increase over the 2007 figure.
Additionally, the average deal value across the sector rose by more than 70 percent, from $137 million to $236 million.
Strategic buyers emerge
But most noteworthy is who has been doing the buying. Across the sector during this time period in 2007, six of the most active buyers by total transaction size were private equity firms; for the beginning of 2008, none of the top buyers were financial buyers, and the group is replete with strategic buyers such as Teradyne, ABB, Topcon and Teledyne. As expected, the valuations paid by acquirors have dropped slightly, with the average EBITDA multiple (transaction value over last-twelve-months’ EBITDA, or earnings before interest, taxes, depreciation and amortization) dipping from 19.9x to 15.1x. This confirms that strategic buyers have found themselves in a market that is no longer dominated by the private equity buyers that once priced them out. Large automation companies are aggressively pursuing targets that at one point may have seemed out of reach.
Confronted with this unique opportunity, successful automation companies would be expected to be on the hunt for strategic acquisitions that fit with their core competencies. For small automation companies with their sights on a strategic exit in the near future, now may be the time to step into the market; larger buyers who feel their opening in the M&A market has come might be looking just for them.
Alan Canzano, ACanzano@CronusPartners.com, is a Managing Director of Cronus Partners LLC, www.CronusPartners.com, an investment banking firm specializing in automation technology.
Nothing contained in this article is to be considered the rendering of financial, investment or professional advice for specific circumstances. Readers are responsible for obtaining such advice from professional advisors and are encouraged to do so.