CEOs have a window for M&A bargain hunting

A global economy plagued by high inflation and rising interest rates has tipped the competitive playing field in favor of US industrial companies, and some are taking advantage to make acquisitions. More should join the club — as long as they have a strong appetite for risk.
US companies have a few clear tailwinds. The strong dollar helps with valuations, which have already been sliced by a steep selloff in stocks. Commodity prices, such as copper, have dropped. While high oil prices have a worldwide impact, Europe will bear the brunt as it faces a long winter of cost spikes and shortages of both electricity and natural gas because of the supply disruption stemming from Russia’s war on Ukraine.
US industrials in general have strong balance sheets. Honeywell International Inc., for example, has $9 billion of cash ready to be deployed. Even if a US recession hits, which economists surveyed by Bloomberg put at a 50% probability, many manufacturers have record amounts of orders to fill and pending work that will keep sales afloat. Those backlogs have increased for 27 consecutive months, according to the Institute of Supply Management, as manufacturers struggled throughout the pandemic to obtain enough supplies and workers to fill orders in a timely manner. Those supply chain snags have eased considerably, and companies are now in catch-up mode.
This is when courageous chief executive officers, buoyed by cash and confidence that their companies can ride out a recession, should go shopping.
Some have already started. Ingersoll Rand Inc. is buying a manufacturer of compressed-air dryers for $525 million. Roper Technologies Inc. bought a maker of software for educational organizations recently for $3.7 billion after selling a 51% stake in its industrial operations this summer to Clayton Dubilier & Rice. Roper has been one of the most active in the mergers-and-acquisitions market as it transforms from an old-style industrial company into a software provider to industry.
Europe is the most likely hunting ground, said Brendan Luecke, an analyst with Sanford Co. Bernstein, who also worked on acquisitions while at Fortive Corp. The euro has dropped 19% against the dollar since the beginning of 2021, making deals cheaper for US companies. Europe’s industrial production is expected to lag behind that of the US, and its inflation will run hotter and longer, according to economists’ estimates compiled by Bloomberg. The economy of Germany, Europe’s manufacturing powerhouse, is forecast to contract 0.4% next year, according to 49 economists surveyed by Bloomberg. Small European companies are feeling more stress because of the spike in costs, Luecke said.
Just in the last few weeks, such deals have popped up. Rockwell Automation Inc. snapped up Cubic, a maker of motor control systems in Denmark. Trimble Inc., a producer of location-based software, bought a French technology company that specializes in spraying systems for sustainable farming. IDEX Corp., a Chicago-area manufacturer, plans to pay 700 million euros ($698 million) for Muon Group, a Dutch producer of microcomponents used in high-tech equipment.
The targets are likely to be the smaller, bolt-on types — partly because it’s too financially risky to do a large deal while the economy is teetering on recession. The Biden administration has also signaled that it will be an antitrust hawk on big acquisitions.
Private equity firms have been on both ends of deals. Those looking to sell companies don’t have an alternative exit ramp from an investment because initial public offerings have mostly dried up. In these turbulent times, targets must be a good fit to withstand a rocky economy.
“If you’re shopping at the edge of a recession, you want to buy quality because there’s going to be a rough patch,” Luecke said. “But, winners should still emerge.”
Emerson Electric Co. is looking to both shed businesses and buy them. Blackstone Inc. is in talks with the maker of automation equipment and air-conditioner compressors to sell its commercial and residential solutions business for as much as $10 billion, Bloomberg News reported on October 5. Under CEO Lal Karsanbhai, Emerson has made a flurry of acquisitions and divestitures, including the sale of its garbage disposal business and the addition of industrial software makers, to remake the company. Karsanbhai is most likely on the prowl now for acquisitions while in negotiations to shed its residential businesses, which would give it more cash.
Analysts have raised concerns that Emerson may end up too dependent on the energy industry if it cleaves off its commercial and residential businesses. Karsanbhai, who took over as CEO last year, is expected to lay out its strategic plan in detail at the end of November. The acquisition activity of late runs against the sentiment, which has cooled considerably this year compared with the red-hot M&A market last year. There were $333 billion of industrial deals either pending, completed or proposed this year through Oct. 5, a 32% drop from the period a year earlier, according to Bloomberg data.
The psychology of company C-Suites is similar to that of consumers. When times are good, they are feeling flush and ready to buy — not so much with dark clouds on the horizon. After Russia invaded Ukraine, China began Covid-19 lockdowns of entire cities and the Federal Reserve started increasing interest rates aggressively earlier this year, companies pulled back on risk because of all the unknowns.

—Bloomberg

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered U.S. industrial and transportation companies and Mexico’s industry, economy and government