Mergers & Acquisitions Market Appears Poised for an Upswing

Honeywell International Inc. General Counsel Anne Madden could hardly have been clearer or more emphatic.

“The pipeline is growing. It’s rich. We feel good as a strategic acquirer,” Madden told analysts late last month after the aerospace, materials and control technologies conglomerate reported its second-quarter earnings. “It’s a hospitable environment for strategic acquirers while the private equity community still is having a harder time financing. So it’s a good time for us to be a buyer and we expect that environment to continue into 2024 and beyond.”

Charlotte-based Honeywell this spring completed its $661 million purchase of Compressor Controls Corp. and announced the signing of several deals, including for cybersecurity and avionics companies. As Madden—who has been part of 100-plus deals over more than two decades—said on the conference call, executives see Honeywell being in a better buying spot than many private-equity players because of how interest rates have climbed since early last year.

The M&A market has slowed markedly in recent quarters from its frothy state in late 2021 and early last year. Middle-market deal activity in the first six months of this year was half that of the same period in 2022. But as observers and analysts begin to sharpen their pencils for their 2024 forecasts, the Honeywell team is far from alone in its bullishness about the next year or more. In a recent report on the building products sector, investment bankers at Fifth Third Bank noted that strategic buyers (think Saint-Gobain, Holcim or Mohawk) have remained active during the recent slump and “may view the upcoming quarters as a buying opportunity,” especially since their balance sheets are very often in fine shape.

More broadly, a new report from global accounting and advisory firm KPMG says a growing number of the firm’s customers across the industrial landscape are dusting off acquisition or divestiture plans that were shelved last year as the Federal Reserve was aggressively hiking interest rates.

“Sentiment among KPMG clients, both corporate and PE, suggests that a resumption of deal activity is likely in the next three to six months,” firm officials wrote recently.

Todd Dubner, deal advisory and strategy principal in the industrial manufacturing group at KPMG, said a big driver of that forecast is that interest rates, labor and financial markets and overall economic forecasts have of late stabilized in a way that would’ve been difficult to picture last fall. That has made businesses more stable and predictable and thus better able to be valued.

“Now, you believe that you can find a buyer who can understand the business and be committed to buying it,” Dubner said.

'For many, it's just the right time'

Scott Mraz, a founding partner of private-equity firm Iron Path Capital, agreed with Dubner that the “more quiet” first half of 2023 is giving way to more activity as executives gain more visibility into and certainty about the economic picture.

“It seems like deal flow has picked up,” said Mraz, who early this month announced Iron Path’s acquisition of private-label chemicals producer Aldon Corp. and the creation of VION Biosciences to house Aldon and future peer companies. “People are settling into the new interest-rate environment and the cost of capital is normalizing.”

Jessica Ginsberg, managing director of business development at LFM Capital, said the Nashville-based investment firm is seeing a similar dynamic as the post-pandemic economic dust settles. But, she added, M&A activity in the lower middle market where LFM focuses—the firm typically focuses on companies with sales of at least $10 million and EBITDA of $3 million or more—also was steadier in the past year than among large companies. A big driver in 2023 has been that more company founders/owners have, after working through the turbulence of the COVID-19 pandemic and the ensuing supply-chain and inflation crises, found a window in which they can properly talk about the big step of selling.

“They’re tired and they need help,” Ginsberg said. "For many, it’s just the right time.”

Ginsberg sees the coming six to 12 months bringing a greater number of companies coming to market, either because their leaders are retiring or because their PE backers look to sell within previously defined timelines.

“I don’t know that it’ll be like flipping a switch, but we’ll get to a point where people will say, ‘We’re not sure just how this will turn out, but let’s just go,’” she said.

Dubner and his team at KPMG also expect more companies looking to offload divisions they no longer see as core to their operations will help drive the coming deal upswing. The pandemic, he said, led many management teams to realize that such subsidiaries are more of a distraction than they might be worth. Now that they’ve spent time to get those units operating at a higher level, they have become potentially lucrative targets for strategic buyers or to PE firms, such as Iron Path and LFM, looking to build a larger business.

“Companies often overestimate the value impact of complexity. That’s one of the myths that tend to not be proven out,” he said. “The value of focus is real.”

A timely case in point: On Aug. 14, the leaders of Toronto-based global materials company Mattr Infratech announced they had signed a deal worth about $166 million to sell most of their pipe coating division to Tenaris, which focuses on steel tubes. The deal is the latest in a series of divestitures for Mattr, whose President and CEO Mike Reeves said his team is now ready “to accelerate its pursuit of focused, high-return growth in our remaining core businesses.”

An added prospective tailwind for the M&A market in coming quarters and maybe even years: The flurry of activity being stimulated by the federal government’s push for spending on infrastructure, clean energy and semiconductor projects. That’s been concentrated so far on factory construction, which is booming, but will over time make its way into orders for equipment and then manufacturing consumables. Dubner said prospective buyers are today looking for companies that can fill product gaps in their portfolios, while Iron Path’s Mraz said the added measure of certainty from these stimulus bills hasn’t yet materialized in orders.

“Everyone’s talking about it but we’re not seeing it just yet. That might just be a lag effect,” Mraz said. “But it makes for a nice industry backdrop.”