United States

Q1 2019 Industrial Products Industry Spotlight



Historically, cybersecurity has not represented as significant a concern for manufacturing as it has for other sectors, with headlines around significant hacks accruing largely to major players in IT and consumer products. But that has started to change as cybersecurity becomes a much greater concern in the IP space, particularly as the Industrial IoT comes online at scale.

Meanwhile, the rollout of 5G technology over the coming year, particularly as it factors into the automotive industry, promises to bring concerns around network stability further up the list for investors targeting the manufacturing space. However, adding network vulnerability checks to the due diligence process can help to reduce the chances of inheriting legacy systems at greater risk of successful penetration by malicious actors. Data security and the attending regulatory challenges are problems that IP dealmakers have not needed to consider. Post-acquisition reviews of a new portfolio company’s IT system can help identify cybersecurity problems before they become a concern for other parts of the enterprise post-integration.

Big picture

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.

Looking ahead

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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