Why the pursuit of truly integrated solutions is driving industrial M&A

Industrial automation, Industry 4.0, increasing connectivity, and the internet of things are all contributing to a rapidly evolving business environment. These accelerating technological trends are giving industrial electronics players food for thought as they look to realign their businesses to profit from the opportunities presented.

Corporates are also looking to emerge from the pandemic with increased manufacturing efficiency, reduced costs and increasing margin to ease liquidity pressures, as well as maximising operating efficiency from an environmental perspective.

Given the power-heavy requirements in the industry, this is a sizeable challenge, requiring power management systems that not only deliver on efficiency but also data, in order to provide insight for further efficiency improvements.

Evolving hardware and software needs

Industrial electronics players are responding by broadening their breadth of capabilities to meet the growing demands of their clients as well as being the solution provider for all their clients’ power management needs.

ABB’s strategy announcement in 2019 proves this point, articulating that ABB is seeking to be a pioneering technology leader providing an end-to-end offering of advanced digital solutions.

It is a bold and intelligent response to the technological disruption at play but will require access to highly efficient and reliable hardware, plus intelligent software, to seamlessly stitch an elegant, integrated solution that is attractive to clients.

For many players, the required software and digital expertise is not currently within their capabilities. Therefore, they are turning to M&A to fill in gaps in their offering. This can be seen in Rockwell Automation’s acquisition of Fiix Inc., which brought in leading AI maintenance solution capabilities.

Activity across the value chain

With this emerging trend in mind, we have analysed the M&A activity of the top 25 global industrial electronics players over the last five years and identified significant activity across the value chain. Even COVID has not affected this trend, with the pace and scale of transactions continuing across 2020 and into H1 2021.

There has been significant and increasing activity in the software and services segments of the value chain, with these segments accounting for around 30% of transactions, and demand for businesses of this kind is driving multiples to record highs above 20x EV/EBITDA.

For example, Schneider Electric purchased RIB Software, a Germany-based company that provides cloud software solutions for construction projects, for a reported EV/EBITDA multiple of 30.7x in February 2020.

Interestingly, for some players, the integrated solutions business model is a key focus of M&A strategy with a particular aim of obtaining access to customized and integrated products. For others, standardised components are increasingly becoming a commodity and there is an increasing trend of divestment of product-only businesses. This is evident in the electrical equipment segments accounting for around 30% of divestments in the five-year period.

What does this mean for the sector?

For high-growth, high-margin software and related services businesses, demand and valuations will remain high, as large industrial electronic players continue to respond to an ultra-connected and increasingly environmentally aware sector. We also expect increasing commoditisation in the product-focused arena to drive consolidation in the market in order to retain margins.