INDUSTRIAL deals are back.
Carrier Global Corp confirmed late Tuesday that it was buying German heat-pump maker Viessmann Climate Solutions for €12bil (US$13.2bil or RM59bil) to expand in the European home heating and cooling market.
Carrier, itself a spin-off of the former United Technologies Corp, will also explore options for exiting its remaining fire and security operations and a business that supplies refrigeration units to convenience stores and grocers.
On Wednesday, Honeywell International Inc announced the US$670mil (RM2.9bil) acquisition of a compressor business that provides control hardware, software and services to the liquified natural gas, refining, gas processing and petrochemical industries.
The turbomachinery operations were included in the package of Roper Technologies Inc industrial assets in which Clayton, Dubilier & Rice acquired a majority stake last year.
What’s interesting about these transactions is that they involve industrial companies buying industrial assets.
Such deals have been fewer and far between in recent years as large manufacturers focused on breaking themselves up and expanding their digital services capabilities with pricey purchases of software makers.
But that’s changing. Earlier this month, nVent Electric Plc agreed to buy ECM Industries – a provider of electrical connectors, tools and cable management – for US$1.1bil (RM4.9bil), and Emerson Electric Co clinched a lengthy pursuit of test-and-measurement company National Instruments Corp with an US$8.2bil (RM37bil) bid.
All told, April is the biggest month for North American industrial takeovers of industrial assets in the past five years apart from some unique outliers that were dominated by a single, blockbuster transaction.
Back to basics
Merger and acquisition activity between industrial companies has climbed in April after a lull punctuated by a few mega-mergers in select industries
So why the recent refocusing on industrial deals? For one, the eye-watering multiples that many manufacturers – including Emerson, Honeywell, Rockwell Automation Inc and Fortive Corp – paid for software deals during the pandemic years generally weren’t well received by investors, who in many cases are still waiting to see these splashy outlays pay off in the buyers’ revenues and profits.
The larger industrial transactions announced this year aren’t particularly cheap, particularly Emerson’s purchase of National Instruments.
But on the whole, these deals are much more reasonably priced than the sector’s software purchases, which also rarely, if ever, offered opportunities for cost savings that might mitigate the high price tag.
Industrial businesses tend to have more overlap or at least backroom functions that can be combined.
Carrier is targeting €200mil (RM1.1bil) in cost savings from the Viessmann deal, mostly by consolidating supply chain sourcing and taking advantage of the combined company’s larger scale, while Emerson says it can cut US$165mil (RM735mil) in costs at National Instruments over five years by introducing more rigor into decision-making around administrative, sales, marketing, research and development spending.
Many of the big break-ups that could happen in the industrial sector have also already taken or are taking place. Emerson, for example, is simultaneously trying to sell majority control of its climate division to Blackstone Inc in a US$14bil (RM62.3bil) transaction.
3M Co is spinning off its health-care division, while General Electric Co is becoming a pure-play aerospace company.
The goal of these divestitures is to streamline companies and focus them on a specific market, but they also allow executives think more strategically about acquisitions of complementary or adjacent assets that could help power growth in their newly designated polestar.
Attractive adjacency
Barclays Plc analyst Julian Mitchell wonders whether lock-maker Allegion Plc – which was spun off from heating and air conditioning company Trane Technologies Plc – might view fire and security as an attractive adjacency to its access-control business and take an interest in the operations Carrier is planning to divest.
Perhaps more than anything, a resurgence of capital spending in the industrial sector, aided by a rewiring of the world’s supply chains and a massive influx of government stimulus targeting infrastructure and climate change, is motivating companies to bulk up in key affected markets.
NVent’s acquisition of ECM, for example, will increase the company’s share of a push toward more connected buildings, spending on grid modernisation, the build-out of electric-vehicle infrastructure and a need for more data centres to keep up with next-generation technologies.
Emerson’s purchase of National Instruments should help it win a bigger chunk of the expected surge of spending on factory automation upgrades as companies rejigger their supply chains to adapt to labour shortages and the shipping and geopolitical disruptions of the past few years.
Honeywell’s purchase of the compressor controls business will give the company more asset-management tools to offer customers seeking to accelerate their energy transition in addition to some technology around carbon capture and sequestration.
Waiting and watching
Shares of Emerson and Carrier have been under pressure in the wake of news of their respective acquisitions, likely reflecting investor apprehension about the integration risk inherent in large deals
Viessmann, meanwhile, offers a unique combination of heat pumps, solar power and battery storage, climate-friendly alternatives to traditional oil-and-gas powered heating and cooling systems that should all be increasingly popular amid Europe’s push for energy independence and greener technologies.
Carrier is essentially substituting the higher-growth, higher-margin Viessmann business for lower-growth, lower-margin fire, security and commercial refrigeration assets with a similar size revenue base today on a combined basis, Mitchell of Barclays wrote in a report.
Certain corners of the industrial market have richer opportunities than they have had in decades, and acquirers are pivoting accordingly.
One might question the wisdom of buying software businesses in 2021 as technology stock valuations peaked and purchasing industrial assets when certain multiples in that sector are hovering near multiyear highs, but a tendency to chase fads is one reason the manufacturing sector doesn’t have the best reputation for capital allocation. — Bloomberg
Brooke Sutherland is a Bloomberg Opinion columnist covering deals and industrial companies. The views expressed here are the writer’s own.
