2023: The year ahead for automation market M&A, capital markets
The automation industry remains strong and robust, but there are questions ahead as a possible economic recession looms. Seven insights on the coming year for the M&A and capital placement markets related to automation are highlighted.
- Understand the state of the market as it relates to the automation industry in 2023.
- Learn about how companies should plan for the future with a potential recession looming.
- Learn about some of the key trends that will be most common in mergers and acquisitions and the impact they’ll have on the automation industry.
Automation market insights
- The global economy has gone through some challenges due to supply chain bottlenecks and other issues, which has led some to believe a mild recession might be on the horizon.
- Companies planning to expand or make other moves for their business should plan for the worst and hope for the best, particularly when a downturn might happen.
- There is an abundance of capital out there, but companies will be choosy about what they do and do not go after as they look to fortify their positions.
Looking ahead for automation market insights through 2023 requires looking back for economic and merger and acquisition (M&A) context. From 2014 to 2021, the U.S. mergers and acquisitions (M&A) market experienced a tremendous amount of activity relative to the years immediately following the Great Recession. In 2022, the M&A market experienced a pullback relative to 2021’s performance by historical standards, but M&A activity held strong and remained on solid footing. Furthermore, the automation M&A market maintained a robust pace of activity, reflecting the industry’s resiliency and growth.
Over the past 12 months, the global economy has experienced new challenges, which included supply chain bottlenecks, torrid inflation, rising interest rates and the looming threat of a recession. While clients continued to perform well in 2022, especially in the automation sector, they are very aware of these headwinds, and questions continue from owners and executives regarding the future for the economy and M&A markets.
Automation market questions include 1) if there is a recession in 2023, then what will the impact be on my industry and company? 2) what does the next year look like for the mergers and acquisitions and capital placement markets and the corresponding value of my business?
These questions are relevant as automation acquisitions in 2023 progress; automation market insights follow:
Automation outlook 2023: 1. If there’s a recession, impacts differ
A recession could happen, but not all companies will be significantly affected. No one knows for certain if a recession will happen in 2023. We often advise clients to plan for the worst and hope for the best; therefore, we are recommending companies to prepare for a recession in 2023.
During down periods, the market fleshes out which services and solutions are of greatest importance to businesses and consumers. Industries and companies that provide mission-critical offerings, such as automation solutions, are expected to maintain quality momentum over the next 12 months. Companies that reside in the discretionary offerings category, or that are embedded in more cyclical industries, could be more negatively impacted during a recession.
Automation outlook 2023: 2. Value in automation acquisitions
Buyers and investors will hunt for value acquisitions. Even in strong economies, buyers are focused on finding quality companies to buy at lower valuations. A recessionary environment gives strategic buyers and financial sponsors a more powerful excuse to extend their due diligence, create doubt about the selling company and ultimately try to acquire the business at a lower valuation.
For organizations seeking to sell or raise capital in 2023, the owners and executives should focus even further on developing and maintaining an optimal position of strength to protect and drive value. For an in-demand market such as automation, owners of companies in this segment should use the power of buyer competition as a means for exiting at a premium value.
Automation outlook 2023: 3. Adding automation acquisitions
2023 will be the year of the add-on acquisition. Financial sponsors, public companies and even privately-owned organizations are often seeking sizable investments in the automation sector. However, add-on acquisitions for existing automation platform investments will be common in 2023. This is due to several key reasons including:
- The platform company can realize synergies by acquiring complementary add-on firms.
- On average, add-on acquisitions require a relatively lower capital outlay than a platform acquisition, which results in a lower risk transaction for the buyer.
- The automation sector has a robust number of existing platforms. Furthermore, the market has an equally broad range of add-on acquisition opportunities due to the fragmented nature of the automation sector. This creates a fertile base for add-on acquisitions to be completed by platforms seeking inorganic growth.
Automation outlook 2023: 4. Business valuation direction
Which direction will business valuations go in 2023? A potential recessionary environment, coupled with higher costs of capital, can negatively impact valuations. However, a company can retain value through such strategies as:
- Operating in a non-cyclical industry, such as the automation market
- Providing critical offerings and solutions
- Managing by such fundamentals as stability, profitability, and growth
- Using the power of buyer and investor competition to maximize value.
The automation market has continued to demonstrate an increasing valuation trend over the past five years. While the macroeconomic trends could place pressure on valuations for automation firms, the extreme demand of buyers for automation firms should serve as a counterbalance to this pressure.
Automation outlook 2023: 5. Available capital
Abundance of capital increases opportunities for automation acquisitions. There continues to be an enormous pool of capital in the market available to invest in the private markets. To be specific, there is approximately $3.3 trillion in cumulative global overhang, or capital committed by investors for private company investments that has not yet been invested. The financial sponsors managing this pool of capital would much prefer putting these funds to work instead of giving them back to investors. Debt capital providers are numerous, but 2023 will see lenders be selective in deals they pursue and will likely require higher equity contributions by strategic and financial sponsor buyers for transactions.
Automation outlook 2023: 6. Targeted processes
Targeted sale or capital raise processes can help with automation acquisitions. In 2023, it will be even more critical for a seller or firm raising capital to select the right parties for conversations. Instead of running a broad competitive process, which involves talking to a large number of parties, it could be more advantageous to start with a highly targeted group of strategic buyers and financial sponsors. This contingent should have a deep understanding of the seller’s industry, a track record of closing transactions in the segment, be well capitalized and demonstrate an aggressive acquisition/investment focus for 2023.
Automation outlook 2023: 7. Options to full ownership
Options are available for sale beyond full or majority ownership. Companies may not be interested in a full or majority equity liquidity event today, but the owners may require capital for such goals as funding growth, partner buyout, refinancing debt or paying the owners a dividend. In addition, these organizations may desire a capital provider that can offer additional resources, such as strategic and administrative support and board-level advice.
Senior debt: Using commercial bank debt or debt from private lenders at commercial banking-like terms.
Debt and minority equity: Using a combination of senior and/or junior debt, in coordination with selling minority equity or offering equity warrants. Over the past decade, the market has seen the evolution of these groups, offering a wider range of flexible capital options for companies.
Minority equity: Companies that want to avoid leverage and don’t want to give up equity control can pursue a sale of minority equity to capital groups that provide this solution.
As 2023 moves through its first quarter, it is certain to be an interesting and dynamic year. The macroeconomic environment could create a wider gulf between companies in terms of business performance, value retention and ability to sell or raise capital.
That being said, Bundy Group is optimistic about the automation market and continued momentum in mergers and acquisitions and capital placement activity for this coveted segment.
There are numerous options and potential, but owners and executives need to stay attuned to market trends and to look for opportunities to maintain and grow in 2023.
Clint Bundy is managing director, Bundy Group, which helps with mergers, acquisitions and raising capital. Bundy Group is a Control Engineering content partner. Edited by Chris Vavra, web content manager, Control Engineering and CFE Media and Technology, firstname.lastname@example.org.
Keywords: automation, mergers and acquisitions
What is your company’s outlook for 2023 for automation?
(1) The State of Industrial Automation Markets Headed into 2023 (Interact Analysis and Association for Advancing Automation)
(2) The Latest Automation Statistics, Trends & Key Market Drivers (2023 A3 Business Forum Report)
(3) 2022 McKinsey Global Industrial Robotics Survey
(4) Wiek, Hilary. “Global Private Market Fundraising Report.” Pitchbook. Nov. 30, 2022.
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