Industrial Technology Leaders are Likely Buyers for First Wave of Post-Pandemic Industrials M&A

May 2020

The COVID-19 pandemic has already brought significant changes to the deal-making landscape. While regular-way deal activity has ground to a halt, strategic Industrial Technology buyers largely remain “open” and accessible.

For private equity investors and private companies eager to reach potential buyers for a mid- or post-pandemic sale, the current climate presents an opportunity to lay the groundwork for a deal or make a connection for a future discussion.

Here are some insights on how Industrial Technology corporates are currently managing COVID-19 and approaching M&A:

Operations Challenged by COVID-19, Demand Forecasts

Corporates are in a similar position to private equity firms and private companies when it comes to their operations during this time. As the pandemic has impacted supply chains and reduced demand, operators are heads down on their businesses, managing the health crisis on their factory floors to protect employees and implementing cost reduction plans.

While most businesses have been deemed essential, some corporates are questioning whether they truly want to be. With the ability to stay open, they are producing. But—save for much-needed supplies for safety, treatment and testing—questions remain surrounding demand conditions in the latter half of 2020. With many plants still open, there may be a growing supply-demand imbalance on the horizon. April ISM Manufacturing Index data shows contraction, but the drop-off was less than anticipated. Corporates expect reverberations from COVID-19 to be felt at least through end of year.

Now’s the Time to Lay the Groundwork for M&A

With the spread of COVID-19, corporate development teams’ actionable opportunities have slowed significantly despite strong cash positions and considerable flexibility. Although stock prices, trading multiples and cash balances remain historically favorable, challenges impeding progress include difficulty ensuring C-suite support and the optics of spending capital on an acquisition while reducing headcount.

While few corporate development teams are proactively calling targets, many have time on their hands and thus are open to inbound conversations and investment opportunities, particularly those aligned with long-term strategic priorities. These teams are finding ways to be proactive and pragmatic to build relationships and buy now—or tee up deals for once the external environment improves.

Key questions remain around post-COVID-19 EBITDA adjustments and valuation multiples. Will this be viewed as a lost quarter that can be thrown out, or will there be a more granular look at the adjustments? We expect that growth-focused strategics will likely take a market-based, yet longer-term view for high quality private equity-owned and privately held businesses.

Lincoln Perspective

When Industrials deal making activity picks up again, we expect the first wave of post-COVID M&A to look very different from M&A in 2018 and 2019. The first wave of Industrial Technology M&A will be driven by well-capitalized corporate buyers and private equity backed strategics.

In the current environment, those looking to sell can plant the seeds for future relationships by building relationships with the best potential buyers now. By investing the time today, PE investors and private companies can improve their likelihood of a strong business outcome either now or down the line.

Here is what else we expect:

What is more, we are starting to see industrial technology corporates and private equity-backed strategics “create” sellers out of sidelined firms—both by working to preempt recent engagements and by working their hit list of targets.