BDO Capital Engineered Components & Materials Q3 2019 M&A Review and Outlook

August 2019


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At BDO Capital Advisors, we focus on advising companies that are involved in the design, fabrication, and/or distribution of highly Engineered Components & Materials (EC&M). Our clients in this sector serve many industries, including:
-Aerospace & Defense                   -Durable & Non-Durable Goods                 -Medical Devices
-Automotive Components              -Electrical Equipment                                  -Specialty Chemicals
-Building Products                          -Electronic Equipment & Instruments         -Transportation Equipment
-Construction Materials

Key Observations:
Multiples Moderate as Deal Mix Broadens and Economy Softens


Sector Deal Volume Up 20 Percent; Multiples Decline 0.7x

U.S. M&A activity in the Engineered Components & Materials (EC&M) sector rose dramatically in the first half of 2019. A Q1 surge eclipsed all but Q4 2012 of the post-recession upcycle. With aggregate deal volume across all industries flat in 2019, the EC&M sector now represents 20 percent of total U.S. M&A, up from 16 percent during the first half of 2018.  Private equity (PE) is responsible (in part) for this trend. PE investing in the sector has expanded from 31 percent of deal volume in 2012 to approximately 40 percent in the first half of 2019. Sector strategic buyers routinely lament the competition caused by rising PE interest.

Our EC&M public company index continues to perform similarly to the broader market. Both our index and the S&P 500 are up nearly 50 percent in the last five years. Public investors seem to be finding the EC&M sector to be a good place to invest. Meanwhile, transaction multiples have retreated recently, with the sector’s average EBITDA multiple declining 0.7x in the first half of 2019 compared to 2018, to 8.3x. We attribute the decline to heightened concerns about the global economy and a broader mix of companies being transacted.

U.S. Economy Remains Positive, But Has Been Decelerating

Business executives and dealmakers have cause for concern but experts indicate that the likelihood of a near-term recession is remote. As such, both strategic and financial buyers seem generally comfortable with more investing while being attentive to downside risk in their valuations and investment horizons.

GDP expanded by an annualized 3.1 percent during Q1 2019, after growing by just under 3.0 percent during all of 2018. These levels far surpass most other G20 economies, which are generally performing at 0.5 percent growth or lower currently. This contrast, plus the tariff threats, have caused heightened foreign interest in U.S. assets while also raising domestic concerns given the global footprint of most U.S.-based businesses at the moment.

See additional details herein regarding projected GDP and business survey recaps such as the ISM PMI and Small Business Optimism Index, all indicating a moderating of the U.S. Economy in coming periods.