We expect 2023 to be characterised by a more disciplined approach to M&A in the industrial manufacturing and automotive (IM&A) sectors as dealmakers contend with the challenging macroeconomic environment. Headwinds such as slowing GDP growth, the Russia–Ukraine conflict, the energy crisis, and rising interest rates and inflation led to a reset in M&A activity in 2022 back to pre-pandemic levels.
Despite market turbulence, companies in the IM&A sectors with strong balance sheets will likely continue to be active in M&A. Corporate players are focused on acquisitions to gain access to new technology and service capabilities or to create scale efficiencies through consolidation. A continued focus on building greater resilience into their supply chains is also keeping corporate M&A activity at a stable level. While private equity (PE) and special purpose acquisition companies (SPACs) will continue to transact, they face a more challenging environment.
Many CEOs are reviewing their portfolios and considering carve-outs and divestitures as they shift focus from growth to profitability and capital allocation. These transactions will raise new capital for investment in more profitable areas. Corporates with lower cash balances are likely to consider more defensive M&A strategies. They may seek opportunities to combine businesses to reach scale and to limit margin erosion from volatile commodity prices and increasing energy costs, especially in Europe. Ongoing supply chain disruptions will likely foster vertical integrations to secure access to key suppliers and raw materials, contributing to an accelerating trend of businesses converging into different sectors.
Uncertainty about market conditions is making it difficult for companies to put forth a near-term budget and agree on reasonable valuations for their businesses. In the short term, we expect the valuation gap between buyers and sellers to prevent some deals from getting done, although we expect the sentiment to evolve from a seller’s to a buyer’s market. Motivated dealmakers will find ways to close the valuation gap between buyers’ and sellers’ price expectations through due diligence and scenario planning.
From a sector perspective, we remain cautiously optimistic about dealmaking activities in aerospace and defence (A&D), mainly due to a recovery in tourism and stability in defence budgets. Transactions in the automotive market will continue to be dominated by the transition to electric vehicles. In the engineering and construction (E&C) sector, increased appetite for infrastructure investments will likely have a positive impact on deals. A healthy level of transactions is expected in the business services sector due to the sector’s somewhat anti-cyclical nature, combined with growing investor interest in technology-led solutions. Finally, the industrial manufacturing sector will likely exhibit stable deals activity, with small to medium-size transactions driven by strategic focus areas and national consolidation in the machinery and equipment niches.
“IM&A dealmakers’ focus is shifting to strategic areas for investment in capabilities and services. This, coupled with carve-outs and divestitures resulting from portfolio reviews, will drive continued deal activity throughout 2023, working through the current macroeconomic headwinds.”
M&A hot spots
We expect the following will likely be hot spots for M&A activity over the next six to 12 months:
- Innovative technologies: Corporates are investing in innovation and new technologies for a sustainable competitive advantage in the medium and long term. We expect tech-driven M&A transactions to influence the IM&A industry in the near term, mainly in relation to batteries and charging technologies for electric vehicles, cloud-related technologies, artificial intelligence and robotic technologies.
- Data analytics: Data analysis to make strategic decisions—and deliver on them—will be critical for industrial players. Dealmakers are assessing how they will manage the high price of input costs such as energy and raw materials along with the right strategy to protect their companies from margin erosion and order volatility. Corporate players are facing challenges passing through higher costs and resetting their pricing strategies.
- People: Companies will need to recruit new talent to increase their strategic and business capabilities related to digital and environmental, social and governance (ESG) transformations. Considering the shortage of skilled labour, the competition for talent will continue, likely driving more ‘acqui-hire’ M&A transactions. These transactions come with their own sets of successes and cultural challenges.
- Cybersecurity: Cybersecurity is becoming increasingly important for all IM&A sectors in connection with digital and cloud transformation. The A&D sector in particular will be significantly affected by the technology evolution and challenges of the cyber world. We expect that companies seeking to acquire capabilities in this field will drive M&A activity.
M&A resets to pre-pandemic levels in 2022
Industrial manufacturing and automotive deal volumes and values, 2018-2022
Sources: Refinitiv, Dealogic and PwC analysis
M&A volumes and values in IM&A decreased between 2021 and 2022 by 11% and 30%, respectively, compared with the 17% and 37% respective declines in the broader M&A market. In spite of the challenging dealmaking environment, M&A activity in 2022 reset to pre-pandemic levels in the A&D, automotive, business services, E&C and industrial manufacturing sectors. The trends were not uniform across countries or regions and indicate investors’ broader shift to find opportunities and growth in other markets. For example, between 2021 and 2022, M&A volumes in India increased by 33%, but in China deal volumes decreased by 35%, mainly due to macroeconomic factors and pandemic-related challenges. While deal activity in Europe, the Middle East and Africa (EMEA) declined by 4% over the same period, activity increased in France, Italy, Spain and Portugal. The Americas saw a 10% decrease in deals activity, while deal values declined by 54%, largely due to a sharp drop in megadeals—transactions with a value in excess of US$5bn—primarily in the business services sector.
While PE’s share of IM&A dealmaking remained consistent between 2021 and 2022, in the second half of the year there was a divergence by type of buyer: corporates with strong balance sheets continued to transact, whereas PE activity decreased because tight debt markets have made financing more expensive and challenging.
“Portfolio optimisation and divestitures will drive new dealmaking activities in the IM&A sector at a worldwide level in the first six months of 2023. The second half of the year could see a normalisation of market conditions, with the reopening of the IPO market and more tech-driven deals.”
Key themes driving M&A activity in 2023
- Portfolio optimisation
- Digital transformation
- Sector convergence
- Environmental, social and governance (ESG)
Portfolio optimisation
We expect CEOs will conduct strategic reviews of their businesses to reassess their current portfolio in terms of market and business priorities to decide which business units to continue to invest in and which to divest. Low-growth or recessionary periods usually make these strategic choices a business imperative—acting early and decisively is the key to maximising the benefits. We expect to see a growing trend of divesting assets to free up capital for new investments focused on sustainability and to accelerate the digital transformation. We may also see an uptick in distressed M&A if current economic headwinds extend further into 2023.
Digital transformation
Digitalisation will certainly be a key influence on the strategic rationale of future M&A transactions across all the IM&A sectors. Companies will use M&A to buy new tech competencies and transform their businesses. Cloud transformation in particular will be a key factor for many well-established corporate players in the IM&A world, especially in the business services, A&D and other industrial manufacturing subsectors, which tend to be characterised by high research and development costs and disruptive new business models.
Sector convergence
We expect more M&A will involve businesses converging into different sectors or subsectors. Automotive companies will continue to seek out early-stage technology companies on their path towards electrification; A&D, E&C, and industrial manufacturing companies will also continue to invest in technology, talent and other capabilities to support their own innovation journeys. We also expect that more companies will buy into other sectors—for example, acquiring mining assets to gain access to critical minerals used in battery production—to strengthen supply chains by directly securing access to raw materials or key components.
Environmental, social and governance (ESG)
ESG is increasingly on CEOs’ agendas, not simply as a ‘check the box’ due diligence task but rather as a long-term lever for value creation. In addition to meeting the standard criteria for an investment thesis, target companies that demonstrate they also bring other attributes that support broader ESG goals may help change the narrative with key stakeholders. This is expected to have a positive impact on valuation and may help push certain important deals over the line.
Aerospace and defence
- In the commercial aerospace subsector, there is cautious optimism as global travel demand continues to recover and aircraft production orders increase. We expect companies will engage in M&A during 2023 to mitigate lingering supply chain issues, such as limited availability of components and strained production capabilities. Many players in the commercial sector are ramping up internal R&D efforts as they aim for net-zero carbon emissions by 2050. We expect this to drive M&A activity as companies seek to acquire the talent and technologies they need.
- Commercial aerospace OEMs are looking to M&A to secure suppliers and production and transform their businesses for the future. Small and midsize suppliers are facing both market pressures and liquidity concerns, which is generating interest in M&A from both sides.
- We expect defence companies to focus on portfolio optimisation by undertaking smaller acquisitions with a strategy of acquiring key capabilities and divesting non-core assets. Increased regulation—which is often based on national security concerns—in the US, UK, EU and several other regions may deter larger transactions and keep defence dealmaking focused on more local market opportunities.
- We expect to see acquisitions targeting niche and specialty technologies to drive deal activity, such as drones, autonomous systems, cyber, space, hypersonics and other defence budget priority areas. We do not expect an immediate impact on M&A from the increase in defence spending attributable to the war in Ukraine. However, the overall stability of longer-term defence budget forecasts does influence investor confidence and will be a positive factor in supporting stable M&A in 2023.
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Automotive
- Dealmakers in the automotive industry remain active despite macroeconomic headwinds, and 2023 looks set to bring plenty of opportunities for M&A. The continued transition of the industry towards electric vehicles and the emergence of new technologies and innovations continue to create an environment in which CEOs need to invest and transform their businesses to stay competitive in the future.
- Understandably, there may be a more cautious start to dealmaking in 2023 due to challenges on the supply side and growing uncertainty on the demand side. Supply chain challenges arising from the semiconductor shortage and disruption to production from COVID-19-related shutdowns have eased in recent months, but high energy prices and access to raw materials remain high on CEOs’ agendas. We expect M&A activity to be stable as companies engage in dealmaking to nearshore or bring supply of critical components closer and build greater resilience into their supply chains. We also expect more cross-sector M&A—not just in the technology sector but also where automotive OEMs are buying into or directly securing product offtake from the miners of critical minerals used in battery production. The OEMs are no longer leaving it to the suppliers to secure these materials and are focusing on those assets in more geopolitically stable countries.
- The trend towards more digitalised and software-powered vehicles in the future will fuel further investment in new technologies—particularly computer aided software engineering (CASE) assets. The availability of software engineers will become a key factor influencing the pace of digital transformation in the sector, and talent will drive the strategic rationale for many acquisitions. We are already seeing examples of distressed M&A, in which buyers are stepping in not for the underlying business model but as an acqui-hire play to gain access to the skilled workforce.
- We expect more portfolio reviews to take place in 2023, leading to acquisitions for key capabilities and selective divestitures, with sales of non-core assets helping free up capital to reinvest. We have already seen some OEMs cut back their investments in autonomous driving and sharing businesses to focus on their core operations. In a more capital constrained environment, this is likely to further affect more innovative, early-stage business models.
- Further consolidation in the retail sub-sector is likely as players compete to gain scale and reach new levels of efficiency, especially in countries where the sector remains highly fragmented.
- We expect to see an increase in distressed M&A—not just among powertrain players but also among all kinds of suppliers, many of which are already dealing with very difficult conditions such as squeezed margins, higher inventory levels and resulting working capital issues. High demand uncertainty and concerns about the macroeconomic context may exacerbate the financial stress that many smaller players are feeling. On the other hand, corporates with strong balance sheets will continue to look for good opportunities and may be able to take advantage of the lower valuations that high levels of business uncertainty tend to bring.
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Business services
- M&A opportunities within the business services sector are expected to remain healthy in 2023, despite the current level of uncertainty due to the global macroeconomic and geopolitical environment.
- The pandemic accelerated the transition from traditional to tech-enabled services, and this trend continues to create tailwinds for M&A. Many sub-sectors within business services will likely remain attractive to investors, with high demand for digital capabilities to transform business models.
- Outsourced services will remain an active sector for investment. While business leaders’ greater focus on profitability and cost reduction measures creates a good hypothetical case for outsourcing, supply chain disruptions may deter some from pursuing a fully outsourced approach as they pursue a strategy to build greater resilience into business models. The valuations of outsourced service providers have also been negatively affected by inflation, although the extent of the impact has depended on the ability of these companies to protect their margins by passing through higher energy or wage costs to end customers.
- Sectors that provide attractive opportunities for a roll-up strategy, such as managed, IT, commercial and residential services, will continue to see robust levels of M&A activity in 2023. We expect to see smaller bolt-on-type deals taking place. PEs—historically active players in this space—may show more caution, in part due to high interest rates and challenges raising financing through leveraged loan markets. We expect these uncertainties to affect multiples, and while some corporates may view this as a buying opportunity, we may see a mismatch between vendors’ and buyers’ price expectations, which could delay some deals being signed over the next few months.
- As investors increase their focus on ESG, we expect that businesses providing tangible or tactical benefits in support of the overall ESG value proposition will be attractive targets. For example, companies that provide capabilities for ESG reporting may satisfy the appetite of buyers seeking assets that support their broader ESG goals or commitments.
- Professional services is another sub-sector where we expect to see M&A activity. Further consolidation of small and local accounting and professional advisory firms will allow them to gain scale, enhance brand value and make new digital investments. These factors could lead to a polarisation of strategies between super-specialised and multiservice firms, each with a different geographical reach.
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Engineering and construction
- M&A in the E&C industry may be affected by skilled-labour shortages as well as macroeconomic factors, putting further pressure on already slim margins and creating greater uncertainty for investors. While residential home building may continue to face a more challenging environment in 2023, we see a more stable outlook for nonresidential M&A.
- Legislation such as the US Infrastructure Investment and Jobs Act, the US Inflation Reduction Act and the EU’s NextGenerationEU recovery plan allocate significant amounts of funding towards infrastructure projects such as roads, bridges, railways and social housing, particularly those that may bring additional tax incentives and funding because they are focused on the transition to clean energy. Public investments will likely be the engine for the nonresidential construction sector and keep investor interest high.
- We expect ESG factors will become increasingly important to both companies and investors. As lenders apply ESG criteria to funding new construction projects, this will affect both the cost and availability of capital.
- Corporate players will continue to acquire, focusing on regional consolidation opportunities to grow market share, to achieve cost synergies, and to acquire technology capabilities or talent to enable the transformation of their businesses. In a more capital-constrained environment, companies are focusing on their strategic priorities, leading to more portfolio reviews and divestitures. Divesting certain non-core assets frees up capital to reinvest in higher growth areas. Some private equity funds with investments in the construction value chain may decide to exit the sector, creating opportunities for corporates with strong balance sheets.
- We may also see some restructuring activity and distressed M&A, particularly for companies that have been most heavily affected by higher input costs caused by inflation, higher interest rates or a slowdown in demand.
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Industrial manufacturing
- Dealmaking activity in industrial manufacturing should be stable in 2023, despite the challenging macroeconomic environment. We believe industrial manufacturing companies will use M&A to support their key strategic priorities, including stabilising and building greater resilience into supply chains and acquiring technology capabilities to advance their digital transformation.
- We expect an increase in portfolio reviews in which companies seek to divest non-core assets to free up capital for reinvestment in areas better aligned to the strategic priorities. Buyers for these assets will likely be small and midmarket companies as well as PE portfolio companies with strong balance sheets that will either strategically or opportunistically seek to expand their platforms and programs.
- With end markets and customers increasingly focused on ESG initiatives, industrial businesses are examining their ESG footprint and looking for products and capabilities to acquire to help them achieve their ESG goals.
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M&A outlook for industrial manufacturing and automotive companies
The M&A environment is challenging for many IM&A companies with macroeconomic factors clearly creating uncertainty around growth prospects and profitability. Companies that can use this time to review their portfolios, pursue M&A to acquire new capabilities and perhaps venture into new sectors will be well positioned to deliver sustained outcomes that will support long-term value creation.
About the data
We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 31 December 2022 and accessed on 2 January 2023. This has been supplemented by additional information from Dealogic and our independent research, and includes data derived from data provided under licence by Dealogic. Dealogic retains and reserves all rights in such licenced data. Certain adjustments have been made to the source information to align with PwC’s industry mapping.
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Global Industrial Manufacturing & Automotive Deals Leader, Partner, PwC United States
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