We are pleased to bring you the first edition of Assembling value, our analysis of mergers and acquisitions in the global industrial manufacturing sector. Companies included in our analysis include manufacturers of industrial machinery, rubber and plastic products, fabricated metal products, and electronic and electrical equipment. As noted in our analysis, the pace of deal activity, as measured by the number of deals announced during the first quarter of 2008, slowed down from 2007 levels, but approached the pace of deals announced during 2006. The increasingly difficult overall environment for deals, which began in the second half of 2007, has clearly impacted trends in total and average deal values for industrial manufacturing targets. This slowdown in the deals market can be attributed to the dearth of large deal announcements, which we have defined as deals with a disclosed value of at least $1 billion.
In this report we note several points of interest pertaining to the industrial manufacturing deal environment. First, interest in industrial machinery targets led all industrial manufacturing categories, as measured by deal value, for deals announced during the first quarter of 2008. Second, financial investment in industrial manufacturing targets was clearly and negatively impacted by the tightening credit market. The percentage of industrial manufacturing deals announced during the first quarter of 2008 which involved a financial acquirer declined to approximately half the level observed in 2006 and 2007. Third, as measured by the number of deals announced with a disclosed value of at least $50 million, the focus of industrial manufacturing acquirers has shifted over time from public and subsidiary targets to private targets. Finally, valuation of industrial manufacturing deals, measured by the ratio of a deal’s value divided by the target’s earnings before interest, taxes, depreciation, and amortization (EBIDTA), indicates that valuation has declined from 2006 and 2007 levels, yet remains above 2005 levels.
Looking forward, we believe that well-capitalized strategic investors are in the best relative position to engage in new deals based upon the cost savings rationale of potential deals as well as a financing environment which remains challenging. We also expect that due to the fragmented nature of the industrial machinery market, consolidation within this category will continue to account for a significant proportion of deal activity for deals announced during the remainder of 2008. We have observed through our analysis that historical deal activity, as measured by both value and number of deals, has tended to be related to the changes in economic output; thus the future pace of industrial manufacturing deal activity will likely rise or fall with economic growth expectations, especially in the US.
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