M&A trends in industrial automation
The automation market is a massive industry with many subverticals — and it’s actively being reshaped by mergers and acquisitions (M&A). To help define the state of the industry, let's dive into M&A market trends and drivers, the impacts of inflation and recent tech M&A market updates that are shaping the landscape of industrial automation trends.
Defining the automation market
First, it’s valuable to understand the different segments that define the automation market, as investors and buyers create different strategies based on the respective solutions. The automation sector includes:
- Control system integrators that design and implement sophisticated control systems for their clients, focusing on systems integration.
- Automation manufacturers that make or fabricate branded automation products or customized products.
- Software automation solution providers that develop proprietary solutions so clients can automate and monitor end-user systems, often involving SaaS and enterprise resource planning (ERP) systems.
- Automation distributors that offer a range of automation product lines, including robotics, sensors, vision systems, and motion controls.
How inflation is impacting the automation M&A landscape
Investment bankers, business owners, and buyers are closely monitoring the impacts of inflation on M&A industry trends. If the cost of products increases rapidly but a company isn’t passing through the costs, then it becomes more challenging to sell or raise capital for the business. In addition, declining financial performance due to inflation could create downward pressure on a company's valuation.
With automation, the backlog can stretch out three, six or nine months. By the time a company receives materials — especially with supply chain delays — the product costs are often creeping up. Many automation solutions firms are educating their customers about supply chain issues and the impact of rising prices.
In addition, proactive firms are either baking potential price increases into proposals or successfully passing the cost increases through to clients. Automation firms that are successful in passing through price increases can retain optimal profitability and valuations, contributing to a positive tech M&A market update.
M&A trend: Financial sponsor roll-ups
M&A activity in the industrial automation space has accelerated over the past five years due to financial sponsors. These organizations make an initial (platform) investment and then complete add-on acquisitions to grow the platform, often targeting M&A software companies and pursuing enterprise software M&A and SaaS M&A activity.
Financial sponsors often include private equity groups, family offices and other institutional investors. As return-driven investment groups, they have a heightened focus on finding markets and companies where the risks are low and the rewards are high. The automation market “fits the bill,” which is why so many sponsors are either invested in the segment today or desperate to complete an acquisition in it.
And there are no signs of this financial sponsor “roll-up” momentum slowing or stopping, especially since consolidation still has plenty of runway and the automation sector is forecasted to grow. This trend is contributing to the overall increase in global M&A activity within the industrial automation sector.
M&A trend: Acquiring for talent
Strategic buyers and financial sponsors have numerous avenues for M&A growth. However, a common bottleneck is finding talented management and employees to perform this highly skilled work. As it relates to M&A, companies are using acquisitions for talent acquisition and retention. This is affectionately referred to as an acqui-hire strategy.
Financial sponsors are frequently working with industry veterans to find investment opportunities and then adding professionals to the leadership team of the platform company. Automation companies are adding bench depth with strategic acquisitions, from CEO positions all the way down to the field technician level. For some firms, M&A is the best strategy to execute growth opportunities, operational improvements and inorganic growth strategies.
Q3 2022 transaction trends
Aggressive strategic buyers have proven they are willing to pay valuation multiples when growth and synergies can be achieved. And valuation multiples have risen in the automation sector over the past five years, driven by strategic growth initiatives and the increasing importance of enterprise software, artificial intelligence, and data analytics in automation technologies.
Demand from financial sponsors and strategic buyers far outweighs the supply of potential acquisition targets. Owners are realizing attractive valuations through sales or recapitalization, especially when competitive pressure is exerted on buyers through an investment banker-led sale process. This trend is particularly evident in M&A manufacturing deals, where technology integration and digital transformation are key drivers of value creation.
How Wipfli can help
If you are considering a merger or acquisition, contact our team. Our M&A transaction advisory services are designed to help you maximize value at every stage of the deal. We combine advanced tech solutions with a global network of tax, audit and financial advisory professionals to give you the insight and analysis you need to create value — even beyond the deal. Our expertise in cloud technologies and market expansion strategies can help guide your M&A decisions in this dynamic sector.
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