There were declines in both the volume and value of transactions and the deal volume was the lowest in the past 12 quarters.
The recovery remains uncertain and investors have largely remained on the sidelines, found the report Engineering growth - First-quarter 2012 global engineering and construction industry mergers and acquisitions analysis.
Across the six industrial sectors studied, there was an increase in the number of mega deals valued at US$1bn or more in the first quarter of 2012, despite an overall decrease in the volume of deals valued at US$50m. Construction and construction machinery accounted for the bulk of deals, driven by infrastructure and urbanisation needs of emerging markets.
Asia dominated activity as Chinese and South Korean companies grew stronger and more active. Governments there are spending on infrastructure, urbanisation, water treatment and energy/power.
Growth expectations in emerging markets remain greater than those for the developed world. In Brazil, the outlook is positive ahead of The 2014 World Cup and the 2012 Olympics in Rio de Janeiro, as both require significant stadium, infrastructure and transportation projects.
Given that organic growth is hard to achieve and the M&A is constrained, indirect consolidation will likely rise in the sector, predicts PwC.
The recovery of the construction sector has been prolonged and rather fragile, says the report. The current risks have had a deteriorating effect on the interest in the sector. Engineering and construction face the challenges of intense competition, materials inflation, weakened private demand for their services, and fewer public projects as a result of budgetary restraints. While these factors will weigh on the value and number of transactions in the short run, they are also likely to promote consolidation in the industry as smaller players strive for survival and larger companies seek growth.
The total number of mega deals across the combined six sectors studied increased to 22 during the first quarter of 2012, almost double the 12 mega deals completed in the fourth quarter of 2011. This led to an increase in total deal value among deals worth more than $50 million during the first quarter of 2012 to $80.8 billion, as compared to just under $59.5 billion in the previous quarter. The increase in total value occurred even though the overall volume of deals exceeding $50 million decreased to 153 in the first quarter, from 168 in the fourth quarter of 2011.
“Overall M&A activity moderated during the first quarter given persistent uncertainty regarding the global economy and an ongoing emphasis to maximize profitability and conserve cash,” said Bob McCutcheon, US industrial products industry leader at PwC. “Issues such as concerns over the sovereign debt crisis in Europe and the breadth of the US recovery continue to weigh on the market. On a positive note, total transaction value grew sequentially during the quarter given the resurgence of mega deals across multiple sectors. Bolstered by strong balance sheets and attractive valuations among targets, the uptick in larger transactions was primarily driven by strategic investors who tapped into their cash resources to pursue selective opportunities. Looking ahead, companies that are benefiting from privatisation and the infrastructure build-out in emerging markets remain appealing targets, particularly in Latin America and Asia. Given the ongoing focus to expand globally, as well as ample liquidity, we expect strategic players to continue to pursue a prudent approach to M&A in the year ahead.”
Despite the needs to expand globally to secure new growth opportunities, the pace of local deals continued to represent the majority of transactions during the first quarter, reflecting the cautious outlook. The pace of local deals worth more than $50 million increased to 66.7 percent of deals in the first quarter of 2012 compared to 65.7 percent of deals in the fourth quarter of 2011. At the same time, cross-border deals (worth more than $50 million) decreased slightly to 33.3 percent in the first quarter, from 34.3 percent in the fourth quarter.
PwC's reports can be found at www.pwc.com/us/en/industrial-products