In the following sections we look at the different lenses that buyers and investors utilize to evaluate M&A and investment opportunities in the flow control and instrumentation sector.
We hope you appreciate these insights - we would be more than happy to provide additional thoughts on the current market at your convenience.
Key Takeaways
Company Positioning: Buyers and investors are searching for companies with a rationalized portfolio of high criticality products.
End Market Thoughts: There are divergent opinions from buyers and investors when it comes to end markets. While everyone values growth, some favor more cyclical industries where growth can be faster while others prefer slower growth markets that offer more stable cash flows.
Moving Up the Value Curve: Top tier revenue growth and high margins are only part of the puzzle that result in higher valuations.
Given the high quality and quantity of current M&A opportunities, strategic players are keen on looking at both smaller, very strategic opportunities as well as transformative M&A opportunities. Further, private equity interest is accelerating as financial sponsors are eagerly looking for new investments. Here are a number of ways that buyers evaluate opportunities:
Criticality of products – Mission critical components in severe service applications.
Product diversity – Diversified equipment providers with a suite of products that offer complex, highly engineered solutions.
Product portfolio rationalization – Service line and / or product rationalization by strategics is occurring in the form of targeted M&A and non-core divestitures.
End market exposure – While many buyers continue to seek ways to broaden end market exposure, a growing contingent of companies are seeking to double down in a single high growth and / or high margin market.
Technology – Manufacturers and distributors are seeking ways to utilize e-commerce, IoT, and warehouse management technologies to more effectively reach customers, efficiently control costs, and manage inventory levels.
Chinese tariffs – Product sourcing channels have come into the spotlight given U.S. – China trade relations.
Oil and gas – Oil and gas exposure is accompanied by cyclicality risk, but offers high growth and strong margins. Midstream and downstream opportunities with limited commodity price exposure are of high value.
HVACR – Consolidation within the HVACR service space, especially by private equity, has led to more sophisticated purchasing and cost management.
Water infrastructure – Aging U.S. water infrastructure requires significant capex investment over the next few decades as the need for restoring existing systems and expanding infrastructure to serve a growing population accelerates.
Aerospace & defense – The passing of the Consolidated Appropriations Act is a significant boost to the defense industry given the muted growth in spending over recent years. Defense supply-chain participants will benefit from increased DoD spending across all aspects of the industry.
Food & beverage processing – Automation and robotics to build operational efficiencies and increase safety standards are leading to growth throughout the food & beverage processing industry.
Other industrial – Overall industrial market growth, both domestically and internationally, remains robust with ongoing increases in industrial economic indicators coupled with favorable macroeconomic tailwinds.
Moving Up the Value Curve
Although the flow control and instrumentation sector is broad across supply chain position and end market exposure, a number of factors are highly relevant to all facets of the sector:
Scale - Team depth and management capabilities that are enabled through technology are key considerations for positioning the company for future growth.
Offering - Managing diversity across products and end markets such that the company remains balanced is key to minimizing business cycles and unlocking value. Offering highly engineered, mission critical, and / or niche products with barriers to entry is attractive to buyers seeking to complement their existing portfolio.
Growth - Demonstrating a consistent historical growth pattern gives credibility to a growth plan. Further, providing a tangible growth plan for sustained top and bottom line growth allows buyers to value future earnings or pay a higher multiple for historical earnings.
Margins - Increased value is placed on companies that maintain a top quartile margin profile inclusive of a full expense burden. Demonstrating manageable ongoing capital expenditures allows acquirers to pay more for the free cash flow stream and increases debt availability.
We hope you find this piece insightful. Please feel free to contact anyone on the Industria team – we would welcome the opportunity to discuss our views.
About the Firm
Industria Partners provides focused strategic advisory services to energy and industrial companies at every point across the business cycle. Through industry connectivity, transaction experience, and expert execution, Industria delivers superior outcomes to its clients.
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