From the perspective of the financial sector, as reflected in merger and acquisition (M&A) activity and performance within the equity markets, the year 2007 was an impressive period of activity and success for industrial automation and control technology companies. The drive to increase integration of automation technologies and create automation solutions continues to drive sales and allow automation suppliers to maintain profitability in a highly competitive environment by increasing the value-added associated with their solutions.
As illustrated in the table, the Cronus Industrial Automation and Control Technology Index (Cronus IACT Index), comprised of seventeen of the leading public industrial automation companies, grew nearly 37 percent in 2007 (through mid-December when this article when to press), while the S&P 500 Index rose 4 percent. There was also remarkable consistency within the Index, with the gaining companies outnumbering the declining companies 14:3.
Strong operating performance drove these strong equity market results, as several leading industrial automation companies reported banner years in 2007 and project even brighter futures in 2008. In aggregate, the companies in the Cronus IACT Index produced total operating income of $31 billion in 2007 on $280 billion of total revenue, which represented a 29 percent increase over 2006 M&A activity in the U.S. industrial automation sector was also robust in 2007.
With 497 deals announced through mid-December, the number of announced transactions in 2007 nearly matched the number of announced transactions in an active 2006. The industrial machinery sub-sector of the market once again saw the most deal activity in the year, with 293 deals, or 56 percent of the total, matching its 2006 percentage performance. Total announced deal volume in 2007 will exceed $116 billion, more than 18 percent higher than the total announced volume from 2006. Interestingly, however, the number of closed deals declined in 2007 relative to 2006, with a drop of 21 percent. One of the factors leading to a comparable amount of deals being announced but fewer being completed could be the turbulence in credit markets, which has impacted the ability of acquirers to deliver the capital required to complete or integrate agreed-upon acquisitions successfully.
Higher Acquisition Premiums
In spite of this credit turbulence, the valuations paid for industrial automation targets by acquirers rose in 2007, with the average EBITDA multiple (transaction value over last-twelve-months EBITDA, or earnings before interest, taxes, depreciation and amortization) increasing from 7.1x to 9.0x, with a median EBITDA analysis producing a similar picture (5.6x to 7.7x). While other metrics, including the revenue multiple and price-to-earnings ratio, can provide important insights into a company’s valuation, they are often surrogates for the EBITDA multiple, which captures the cost of acquiring a firm’s cash flows (excluding financing, investment and tax requirements). This is consistent with what we expected in this space when the credit crisis broke (see “No Time to Panic,” October 2007, p. 74). Acquirers in this sector were relatively more eager to pay higher acquisition premiums in 2007, presumably because of the greater security and predictability of performance of industrial automation companies than of those in the broader market, particularly in a tighter credit environment.
With another successful year now in the rearview mirror, whether from an operational perspective or certainly from the perspective of the financial markets, the industrial automation industry will look to build on the foundations of 2007 and continue its winning streak in 2008, fueled by continued international expansion and relatively advantaged access to capital.
Alan Canzano, [email protected], 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.