As a partner with EY’s Transaction Advisory Services’ America Industrials Sector, David Gale keeps his finger on the pulse of industrial markets, including electrical manufacturing and distribution. Looking at 2017, he says mergers and acquisitions (M&A) activity was “pretty good” throughout the year, although it paused slightly as the politicians came down to the wire with figuring out the parameters of the new tax law. “We were also coming out of a post-election pause in 2017,” says Gale. “Overall, I expect activity to be even better in 2018 versus 2017.”
Here, Gale reveals his insights for the upcoming year on the M&A front and drills down into the industrial and electrical markets, paints a picture for the next few quarters, and offers some sage advice for companies that want to best position themselves in the current business environment.
Q: Six weeks into 2018, what level of M&A activity are you seeing and what market drivers are impacting this activity?
A: The macroeconomic environment is really solid right now, as you know, so the fundamentals within that market that drive the M&A business (i.e., the amount of cash on corporate balance sheets, in private equity funds, and in the credit markets) are still in extremely good shape. At the same time, an overall confidence—which was kind of the one lagging indicator that drives the M&A market—and now with tax reform in place, many corporations are going to have a little bit more money to deal with from the tax savings. I think those fundamentals are going to continue to be really strong in 2018.
Q: Is anything else driving M&A activity at this point?
A: Yes. There are also some strategic factors that continue to drive the M&A market around the need for growth; the need for operational improvement and efficiencies; the global depth and breadth of our economy; the need for profitability; and the need for technology. When you combine all of these factors, the indicators seem to point to a pretty solid M&A market overall. That applies throughout all of the sub-sectors within the industrial markets. Specifically, we’re seeing activity in chemicals, aerospace, and defense. You can also just look at the headlines and see the many different large companies that are restructuring themselves. I think that will result in more assets becoming available on the market—assets that ultimately get purchased by other corporate strategy players or private equity funds.
Q: How does the electrical distribution industry fit into this M&A picture for 2018?
A: When you look at those broad indicators that I just talked about, there are some definite themes that are going to apply to the industrials and to the electrical manufacturing and distribution market. For example, as you work your way up the chain to some of the larger electrical equipment suppliers and right down to the mid-tier distributor, there are some definite economies of scale to be gained through mergers and acquisitions, and particularly with the larger acquisitions. This should make the smaller electrical distributor wonder just how long it’s going to be able to survive against these economies of scale.
Q: What should the smaller distributor be doing now to combat those economies of scale?
A: They need to figure out what niche they want to play in. Otherwise, I believe there’s a good chance that they’ll get gobbled up in the consolidation that continues to take place. Another key consideration is the vertical integration that we’re seeing. Where is that vertical integration going to settle in? For example, how far down are the manufacturers going to come in terms of the supply chain? And, how far are the manufacturers going to come down the supply chain? And then how far could others potentially move up? And that gets to the whole idea of sector convergence (which EY defines as companies making increased and deeper incursions into adjacent or unrelated industries) we see taking place across a lot of different industry sectors.
Q: Can you give us an example of how these various trends are playing out in the industrial sector?
A: On the technology front, it’s about predicting what the shop floor is going to look like in the future. And in distribution, we can look at how this activity is going to take place in a world that centers around the customer and requests like, “I want products that are tailored to my individual needs,” or “I want them faster, and delivered right to my doorstep.” Companies need technology to be able to meet those requests, so digital, data analytics, and the Internet of Things (IoT) are all going to become more prevalent within a lot of different markets—and definitely within the electrical distribution sector. The players that can reap the benefits of that technology earlier will be the ones that have the advantage over those that don’t.
Q: What’s going to happen to companies that are behind the tech curve now?
A: Let’s just say the electrical distributor that’s struggling with this issue isn’t alone, nor is the manufacturer that’s used to bricks-and-mortar and good at making stuff. But as you look at what Amazon has done to the world in terms of impacting consumer buying patterns, it has put retail under a lot of pressure. It’s not going to end with consumers and retail; it’s going to make its way through our whole economy. The pace of change is going to have to be quick and we’re all being challenged by it right now.
Q: Can you share any other advice with the distributor that wants to best position itself for success despite all the disruption that’s impacting industry right now?
A: It’s important to understand that technology is already here, and that more of it is coming in the future. Companies need to stay on top of this and realize that it’s not just going to stop with consumers and the retail sector. It’s already in both manufacturing and distribution, where some people are still working with an “old school” mentality. That mindset is going to become more and more obsolete and will push companies to change. Finally, I’d say that the distributor that wants to be—and stay—successful, and if it doesn’t necessarily want to become an economy of scale, will have to figure out which niche it wants to play in and really delve into that niche and maximize it.
Tagged with acquisition, industry