Q1 2019 Industrial Products Industry Spotlight
Geopolitical and macroeconomic uncertainties around trade policies and tariffs continue to weigh on dealmaking sentiment in the industrial products (IP) space, despite progress over the past year on revisions to NAFTA and the recent thawing of negotiations with China. Other factors have suppressed dealmaking through the first quarter of 2019, helping to pull overall activity down to lows last seen in 2014. Labor costs continue to strain bottom lines for players across the sector. On this front, manufacturers continue to contend with both an aging labor pool while facing down the prospects of a dwindling supply of workers seeking employment in the space. According to figures from the U.S. Bureau of Labor, the number of unemployed workers per job opening fell below one in the latter half of last year for the first time since at least 2004. However, more manufacturers have started to explore novel options to retain talent that include foreshortened work weeks and greater flexibility around on-site responsibilities, along with job sharing. In addition, RSM has found that a growing number of manufacturers are committing capital to training programs while some are expanding internship and apprenticeship opportunities on a regional basis to strengthen local workforces.
Few in the middle market have started hedging against increasing commodity or input prices. At the same time, manufacturers have been slower than expected at implementing capital expenditure programs geared to improving their digital strategies. Although companies coming onto the market did so at a slower pace, others have already started to prepare for the sales process. Meanwhile, elevated asset prices in North America have prompted some investors to look further afield to find value.
As a result, financial sponsors have become more open to complex deal structures, international buyouts and exploring carve-out options. This trend, which has taken shape over the past 18 months, should help to increase the volume of cross-border deals going forward, as it will remain difficult to afford domestic assets given their historically high multiples.
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