Industrial Automation – global megatrends are turbocharging M&A activity

In the first of a series of articles on the Industrial Automation sector, we look at growth trends, corporate strategies and how they are influencing M&A in the sector.

Disruption continues to drive profound business change across industries, with the Industrial Automation sector no exception. With a backdrop of a number of global long-term tailwinds, the overall outlook for the Industrial Automation landscape is overwhelmingly positive, which in turn is expected to drive continued M&A activity. We expect the sector to be a hotbed for deals as large conglomerates seek to optimise their portfolios and attract investors with an astute eye for non-core carve-outs, and the attractive margin profile of the sector continues to attract private equity interest seeking to drive value creation. 

Significant market growth expected

Global megatrends are reshaping the market landscape and creating unprecedented opportunities. In response, leadership teams are sharpening their strategies to ensure that they are taking advantage of tailwinds and mitigating risks, with M&A a central enabler for this.

The Industrial Automation market consists of control systems and information technologies that automate industrial operations, with the market generally classified by three subsectors – process, discrete, and warehouse¹. The overall market has grown by 8% CAGR in the last few years and is today valued at around $220bn. Further growth is anticipated, to the tune of more than 10% CAGR by the end of this decade.
 

Robust historical and projected growth forecasts demonstrate the opportunities within the sector and an urgency for transformation to ensure alignment with significant technological, environmental, and geographical changes.

Global megatrends driving adoption of automation

• Digitisation & AI: The latest wave of technological advancements (e.g., IIoT, AI, ML etc.) is rapidly enhancing Industrial Automation offerings across predictive maintenance, real-time monitoring, and remote access. The refinement and declining costs of these products is reducing payback periods and in turn increasing deployment rates.
   
• Energy transition: Industrial Automation is expected to be a key lever for all industries as they embark on this ever-increasing transition to a new energy efficient global landscape. Automation capabilities coupled with digital technologies will be critical to drive electrification, decarbonisation and environmental sustainability, which are key strategic priorities for all corporate boards. 
   
• Demographic evolution: China, India, the Middle East, and Africa are and will continue to be centres of population growth and urbanisation. To support this, significant investment is required providing opportunities for new automation technologies to be implemented from the outset, as is being seen today in the development of smart cities. 
   
• New global equilibrium: In the wake of COVID-19, the ensuing supply chain disruptions, and ongoing geopolitical instability, companies ​are seeking to re-shore and build resilience in their supply chains. Together with rising labour costs and constraints, this is driving greater adoption of automation technologies.
   
• Demand for “end-to-end” solutions: To ensure the efficiency and effectiveness of automation technology adoption, customers are increasingly seeking “end-to-end” solutions. As a result, suppliers are strengthening their offer to provide hardware components, software capabilities, and consulting services that deliver a holistic solution to their clients.

The alignment of the Industrial Automation sector with these megatrends has led to the sector consistently outperforming the broader Industrials sector since Jan-19. As seen in Figure 2, on a rebased basis as at Jan-19, our basket of publicly traded Industrial Automation companies have seen a 100% share price increase compared to the 83% increase in the broader S&P 500 Industrials Index.
 

Corporate strategies are being reshaped in response to market dynamics

The global Industrial Automation market is highly fragmented, with players seeking to combine hardware and software-based solutions to keep pace with the market. As a result, a key strategy deployed by industry players has been to boldly reshape their corporate portfolios through M&A to take advantage of these megatrends.

Many of the transactions to date illustrate a number of M&A strategies adopted in the sector:

• Portfolio realignment: large players are using M&A as a tool to incorporate new technologies to maintain a competitive edge and divest lower growth/margin divisions to ensure an appropriate capital allocation and maintain operating margin targets.
   
• Tech capabilities enhancement: corporates are also seeking to add or augment capabilities to align with megatrends; particular areas of interest include software, robotic, and cybersecurity capabilities. 
   
• Recurring revenue generation: Companies are looking to increase their proportion of recurring revenue streams – a popular way of delivering this is by adding subscription SaaS offerings, for example.

A number of large international industrial automation players are leading the market in these efforts, including Siemens, Schneider Electric, ABB, Rockwell, Emerson, and Honeywell; as evident from their high levels of M&A activity over the last five year (see Figure 3). 
 

By way of example, over the past three years Rockwell Automation has used M&A to supercharge its autonomous robotics capabilities (e.g. acquisition of Clearpath Robotics in November 2023 for $615m), expand its cybersecurity offering (e.g. acquisition of Verve Industrial Protection in October 2023 for $185m) and ensure its software-as-a-service capabilities (e.g. acquisition of Plex Systems in September 2021 for $2.2bn). 

Large corporates have also been divesting non-core operations to appropriately align their portfolios. A number of players have completed or announced divestment programmes, including the likes of Schneider Electric and more recently Honeywell, which has disclosed that approximately 10% of global revenue will be divested over the next few years. Similarly, Emerson sold a majority stake in its Climate Technologies business to Blackstone for ~£10 billion in October 2022 to allow it to become a pure-play global automation company.  

Strong growth prospects mean players must be alive to opportunities

The strategies outlined above, to align portfolios with future growth opportunities, as well as the desire to rationalise non-core businesses is in turn, driving M&A volume in the sector. Deal volume has grown by 13% per annum over the last four years, compared to a modest decrease of -1.5% in the broader industrial M&A space, while deal value has grown by a huge 29% per annum over the same period (see Figures 4 and 5 below).
 

Equally, with the increase in M&A activity in the sector and the eagerness of strategic buyers to secure assets, we have seen valuation across the sector rise. Over the last three years, typically EV/EBITDA multiples have increased from ~13x to ~15x , compared to ~7x to ~9x in the broader industrial sector. For those who have successfully built differentiated businesses of scale, there is no shortage of buyers willing to pay a premium!   

Outlook remains promising

With an ongoing need for the acceleration of many of the global megatrends driving the adoption of automation (e.g., energy transition, electrification, and decarbonisation), significant capital investment is being made across all major global territories, whether that is to be delivered through new, cleaner energy generation facilities, or the development of huge “smart cities” (e.g. Neom in Saudi Arabia or Amaravti in India). This investment will, in turn, continue to drive the adoption of automation technologies and the desire for those active in the sector to grow their capabilities and geographical coverage. 

As a result, we expect M&A to remain a key theme in the industrial automation market, valuations to remain high, and there to be significant value creation opportunities for those who can put capital to work within the sector.   

1. Process automation involves the incorporation of technologies, such as valves and sensors, to manage complex processes (key end markets include Oil & Gas and Chemicals); Discrete automation involves the incorporation of technologies, such as robots and PLC solutions, to control manufacturing operations in factories/ plants (key end markets include Automotive, Electronics and Aerospace & Defence); Warehouse automation involves the automation of inventory handling from arrival to delivery