Specialty Materials M&A Activity Increasingly Concentrated in Less-Cyclical Sub-Sectors

As investors brace for a potential economic slowdown, specialty materials companies and sectors that are more insulated from a potential downturn continue to command significant interest and attractive valuation multiples.

Monday, December 16, 2019

Overall M&A activity in specialty materials has softened, as the broad market anticipates that the economy's current expansionary phase could be nearing an end. M&A valuation multiples and the dollar value of deals completed in 2019 have declined relative to 2018, while the number of completed transactions is flat.

A few high-level themes are driving a softer M&A environment. First, economic growth is slowing. In the first two quarters of 2019, industrial production declined 2% relative to the same period in 2018, according to the U.S. Federal Reserve. Secondly, economic uncertainty has increased. According to the Conference Board, CEO confidence is at its lowest level since Q1 2009, limiting companies' pursuit of M&A activity. Finally, the last two years have seen many attractive companies already acquired, reducing the potential pool of attractive acquisition targets.

Financial sponsors and strategic investors are focusing on companies and sectors that are more insulated from a potential economic downturn, as slower economic and industrial growth have impacted the specialty materials industry broadly. Businesses serving less cyclical end markets continue to transact at strong multiples, while their more cyclical counterparts have seen decreasing interest. Highlighting this trend, deal activity has been particularly strong for medical, aerospace and defense (A&D), and coatings companies, while the automotive and semiconductor sectors have experienced significant declines.

Strategic buyers remain active as large corporations search for growth and look to hedge against market risks. In addition to driving growth through acquisitions, some specialty materials companies are seeking to drive shareholder value by optimizing their portfolios through carveout transactions.

Highlights of this report:

  • Strategic buyers look to acquire growth
  • Medical, aerospace & defense, and coatings command robust interest
  • Buyers increase diligence focus on integration and cyclicality

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