In this article for Automation World, Clint Bundy of Bundy Group provides insight into strategic buyer and investor interest in the automation industry and macroeconomic effects on the automation market.
Bundy Group is an investment bank and advisory firm specializing in the automation market, which includes such sub-markets as control system integration, warehouse automation, robotics and the Industrial Internet of Things (IIoT). Following is an update on our key takeaways around the trends in this segment from a mergers and acquisitions (M&A) and capital placement perspective.
To start, the automation industry continues to draw a tremendous amount of strategic buyer and investor (i.e., financial sponsor or private equity) interest, which is driving consolidation activity in the automation market. At the recent a3 Business Forum, Control System Integrators Association Conference and Automate events, I held numerous meetings with executives and corporate development directors to better understand buyer sentiment for the automation sector in the current economic climate. After attending these conferences, Bundy Group conducted a survey of the most active buyers and financial sponsors in the segment. Respondents expressed enthusiasm over the state of the market and continued growth in the automation sector, but there are some considerations to note.
One of the key topics today in the M&A community is the current macroeconomic environment, including continued concerns about a recession and how it might impact the automation market today. Owners and seasoned buyers are watchful of the potential negative impact on companies due to the recent credit market challenges and the consequences from the Silicon Valley Bank and First Republic Bank failures.
As one executive stated: Rising interest rates and tightening lending restrictions will “make us more selective in what companies we buy, as we can’t have foot faults in these conditions.” This executive also said, “Our main lender is still supportive of our acquisition focus and growth efforts and will provide funding, but it has tightened our credit line from $50 million to $25 million over the past few months.”
Automation organizations continue to face difficulties in finding talented engineers and other technical talent. Alex Chausovsky, vice president of analytics and consulting at Miller Resource Group said that “while the overall unemployment rate was 3.7% in May, up slightly from the 50-year low of 3.4% in April, engineering roles had an unemployment rate of just 1.8%. This underscores the difficulty that many automation firms have in attracting, hiring and retaining top engineering talent. Even with a mild recession on the horizon for later this year, it’s critical for automation companies to continue to backfill roles and attract new talent to position themselves for the next macro rising trend, which will likely begin in the latter part of 2024.”
Bundy Group’s survey of 10 executives/investors with experience in automation industry acquisitions validated the insights heard at the automation conferences and added several new takeaways:
The economy and automation market. Despite continued concerns around a looming recession, the majority of survey respondents are not planning for a recession in the next 12 months. In addition, nine of 10 executives expect their own businesses to grow in the next year. These respondents’ confidence helps validate the strength and resiliency of the automation market.
Merger and acquisitions. The respondents universally signaled continued and strong interest in acquisitions, indicating the automation market still has plenty of runway left for consolidation. Most respondents said the industry is not even halfway through its aggregation cycle. Furthermore, on a 1 to 5 scale (1 = not looking for acquisitions; 5 = aggressively looking for acquisitions), the average response was a 4.4, indicating M&A is alive and well with the brand name buyers in the automation industry. Furthermore, all but one of the respondents stated that current events in the financing markets have not decreased their appetite for acquisitions. As one executive said, “Rising interest rates have resulted in our taking a more conservative approach to acquisitions, as we are now placing an increased emphasis on quality, growing companies.”
Business valuations and deal structure. Business owners often ask Bundy Group about the current valuation multiples for businesses, i.e., are they increasing or decreasing? Six out of 10 buyer and financial sponsor respondents revealed they do expect automation valuations to decrease over the next 12 months compared to current levels. One executive with a strategic buyer said, “High quality assets will fetch historical valuations, but less attractive or higher risk transactions will see valuations reduced and less demand overall.”
An equally important topic is what compromises a company’s valuation. Upfront cash from a buyer to a seller is an obvious component, but there is also creative structuring that can be utilized, which includes:
Buyers can, and sometimes do, utilize creative structuring to minimize risk and ensure the seller has a vested interest in future success of the business. As one respondent stated, “We are asking for higher equity rollover from sellers today, such as 25-30% versus 15-25% in the past.”
Based on what we’ve learned from the automation conferences and the survey, a strong level of enthusiasm remains among owners and buyers. The multi-billion-dollar automation market continues to thrive and evolve, and buyer and financial sponsor confidence is relatively strong in this uncertain macroeconomic environment. Judging by the robust performance of Bundy Group clients, coupled with the strong valuations we are receiving in our current client engagements, our team sees no momentum or value loss in the automation industry.