M&A Trends in Industrial Manufacturing and Automotive

IM&A is by no means alone in seeing a steady fall in both deal volume and value in the past two years. Total deal volume in the UK in 2023 was 18% lower than in 2022, and almost a third lower than in 2021 while in IM&A, the number of deals dropped from 1,205 in 2021 to 899 in 2023. Deal values also fell sharply, from a high of £46.9bn in 2021 to £10.3bn in 2023, again reflecting the broader trend in the UK.

A reduction in the number of megadeals in almost every sector is behind the fall in deal values and this is particularly visible in IM&A, where the desire for scale has historically driven deal activity. But not any more.

The primary purpose of deals today is as a strategic tool for transformation. The pace of innovation is such that business leaders see the imperative for transformation as existential. PwC’s 27th UK CEO Survey found that 21% of UK business leaders believe that their company will not be economically viable in 10 years if it stays on its current path. For businesses in every sector, this means transacting to gain the skills, technology or market reach they need.

The priorities for industrial manufacturing and automotive deals

Transformation means different things for different sectors but in IM&A, we are seeing three primary driving factors behind transformative deals.

Creating value through decarbonisation

Pressure from investors, who are focused on green technologies, is driving rapid change – and corporates are racing to decarbonise while simultaneously meeting the requirements of increasingly ESG-focused private equity investors. Businesses are expected to increasingly redirect released capital towards emerging areas, particularly renewables, to enhance resilience and establish a lasting legacy.

But sunset industries associated with fossil fuel extraction and processing still have considerable value and longevity, and the priority is to realise maximum value for these assets while investing in newer technology.

The search for service-based revenue

Just as software companies have found new and reliable revenue streams in software-as-a-service (SaaS) options, Industrial firms, which have traditionally been single-transaction businesses, are looking for ways to maintain the client relationship and encourage repeat revenue. The answer is adding a service-based element to their offerings, often through acquisition or merger. A good example of this is Hitachi Rail’s acquisition of the UK-based sensor specialist Perpetuum in 2020 – Perpetuum’s technology, which measures vibrations and monitors train parts in real time, has allowed Hitachi Rail to offer efficiency-based predictive maintenance services to its customers.

Building resilience in supply chains

Geopolitical instability has highlighted the vulnerability of supply chains in recent years, leading many companies in the IM&A sector to consider localising to create more robust and resilient supply chains and to reassess the vertically integrated business model.

Be prepared for what’s ahead

With finance costs high and economic conditions challenging, dealmakers and investors will be more careful and financing will be more expensive than before, with private credit playing a far greater role in deals – private equity now accounts for more than half of all deal value in the UK. IM&A businesses and their leaders need to be prepared for what’s ahead.

Get creative on the buy side
Tell a good story on the sell side
Focus on value creation

Get creative on the buy side

It’s important to take a creative and broader view of assets and companies that add value or create differentiation in a rapidly evolving environment. But this assessment takes experience and specific skills and it’s essential that companies have the capability to evaluate businesses and acquisition opportunities effectively.

Tell a good story on the sell side

The risk in IM&A is that too many assets will be considered as dying legacy businesses, and therefore of relatively low value. Huge value still sits in these assets, but investors need to hear a compelling story – which means articulating where value sits. This is particularly critical in attracting private equity investment, which has arguably neglected IM&A in the recent past. IM&A businesses are beginning to show the hallmarks that are attractive to private equity – ESG-focused, led by technological innovation, and value creating.

Focus on value creation

Our research shows that regulatory and compliance issues, and technology systems and data integration issues, are seen as the principal challenges to achieving post-transaction value in IM&A deals. A post-transaction transformation strategy will need to be clearly and persuasively set out. With technology and productivity top of mind, this includes thinking about the impact of innovation incentives and taxes, which are sometimes ignored in value creation plans that are focused on EBITDA.

To learn more about how deals are transforming one of the UK's longest established industries, explore insights into global and sector-specific M&A trends or delve into the findings from our latest Value Creation report.