Credit Crisis Hampers Deal Activity in the Industrial Manufacturing Sector

This year's reduction in large deals is the direct result of a weak financing environment, along with a decreased role of financial investors in deals.

The pace of deals in the global industrial manufacturing industry has slowed significantly during the first three quarters of 2008, according to a report released on Nov. 11 by PricewaterhouseCoopers LLP.

The report found that the number of deals with a disclosed value of at least $50 million announced during the first three quarters of 2008 (126 deals), is not likely to match last years level (207 deals) but is on pace to approach the number of deals announced during 2006 (169 deals).

The majority of deals that took place so far this year in the industrial manufacturing sector involved industrial machinery targets (42%), which is consistent with previous years. Interest in electronic and electrical equipment targets accounted for 20% of deals while rubber and plastic products categories accounted for 15% through the third quarter of 2008. In addition, acquisitions of public and subsidiary entities led all deal targets over $50 million (68%) during the first three quarters of 2008 while deals for privately-owned targets continue to increase steadily over time, accounting for 30% of all targets in the first three quarters of the year, rising from 27% in 2007 and 23% in all of 2006.

The total deal value of deals announced during the first three quarters of 2008 ($35 billion) is significantly behind last years level ($88 billion) mainly due to an absence of large deal announcements (defined as deals with a disclosed value of at least $1 billion) during the third quarter; there were only four large deals announced during the first half of 2008. Average deal value also declined, totaling only $277 million in the first three quarters of 2008 compared to $425 million during the same time period last year and $545 million in the first three quarters of 2006.

"The global credit crisis and intensified recessionary concerns have taken a significant toll on both the pace and value of dealmaking in the industrial manufacturing industry," said Paul McCarthy, U.S. industrial manufacturing transaction services strategy leader at PricewaterhouseCoopers. "Historically, deal activity, as measured by both value and number of deals, relates to fluctuations in economic conditions. Since the long-term drivers of M&A in this segment -- such as globalization, consolidation and increased competition -- are structural, and not cyclical, we expect that deal activity will increase upon improvements in economic growth expectations. Until that point, economic anxiety could potentially lead to an increase in distressed deals, giving a counter-cyclical boost to short-term deal activity in the industrial manufacturing sector."

This years reduction in large deal announcements is the direct result of a weak financing environment, along with a decreased role of financial investors in deals. In the past, financial buyers have typically been involved in larger deals with higher values. In 2008, financial investors participated in only 33 deals, allowing strategic investors to claim 74% of the ownership of industrial manufacturing deals.

The study revealed that the UK/Eurozone region remains the leading target in terms of both global deal activity (31.7%) and deal value (46.4%) that has been announced in the first three quarters of 2008. Meanwhile, North America acted as the leading acquirer (31.7%) in deals worth $50 million or more. The weakness of the U.S. dollar contributed to foreign investment interest in the region, with 30% of deals involving U.S. targets executed as cross-border deals in 2008, compared to 22% of similar deals for U.S. targets during 2006 and 2007.

China remains the most attractive BRIC (Brazil, Russia, India, and China) country, accounting for the majority of deals (over 90%) announced for BRIC targets during the first three quarters of 2008.

"We may begin to see U.S. acquirers taking more ownership in U.S. deal targets as the dollar begins to strengthen and difficulties in obtaining local financing deflect foreign investments in this region," said Misthal. "While there has been an overall slowdown in deal activity, our analysis found a substantial increase in deal activity for targets in China, which has significantly outpaced other emerging economies like Brazil and Russia."

For more information on the report visit: www.pwc.com/manufacturing.

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