Q3 2018 Industrial Technology M&A Market Update

October 2018

Despite rising international trade tensions and modest tightening of domestic and global financial conditions, economic instability did little to abate overall market euphoria among middle market businesses in the second quarter. While sentiment has moderated in the aftermath of the federal tax cut, fostering business investment in productivity—enhancing areas such as technology, machinery, and computers—was a primary impetus for the 2017 Tax Cuts and Jobs Act (TCJA). We believe the eventual impact of procyclical fiscal stimulus could supply the underlying current for future deal making in 2018. 

This is especially true for the Industrial Technology sector where the Industrial Production Index reached 107.7 in April, its highest level in the past 10 years and M&A deal value increased more than 28% in the first half of 2018 compared to 2017. Automated systems and robotics enable companies to increase productivity at growing rates of return on investment.  As a result, automation technology continues to proliferate worldwide markets at a quickening pace. With adoption expanding across an increasing number of verticals, more businesses are incorporating industrial technology into their assembly and production equipment.  As usage of the Industrial Internet of Things grows, smart automation is expected to foster cost efficiencies while simultaneously boosting industrial output through predictive maintenance. Notwithstanding these trends, two of the biggest concerns for dealmakers in 2018 continue to be the high-priced environment coupled with a lack of quality targets.  Median U.S. Industrial Tech M&A transaction multiples rose to 15.1x through the first half of 2018, the highest level reported over the past six years.  We expect strong momentum in M&A activity across the Industrial Technology sector through the remainder of 2018. Robust competition between strategic players seeking to grow market share and private equity (PE) firms looking to deploy pent up stores of capital, coupled with historically high valuation multiples, creates an optimal M&A environment for selling shareholders in this sector.