Capstone Partners Highlights M&A Growth in Industrials Amid Economic Changes

Summary of Capstone Partners' Annual Industrials M&A Report

Capstone Partners, a prominent middle market investment banking firm, recently published its Annual Industrials M&A Report, presenting critical insights into the current landscape of mergers and acquisitions (M&A) in the industrial sector. The report not only examines public market valuations and prevailing macroeconomic conditions but also discusses merger activity trends and predictions for the industrial sector in 2025.

The year 2024 posed unique challenges for the U.S. industrials sector as it responded to shifting economic variables, including construction trends, labor market fluctuations, inflation, monetary policies, and geopolitical instabilities. Despite a slight slowdown in real gross domestic product (GDP) growth to 2.8% from 2.9% in 2023, consumer spending persisted as a significant contributor to economic vitality. The rise in the Personal Consumption Expenditures (PCE) Price Index by 5.3% year-over-year, driven by mounting incomes and enhancements in labor market conditions, reflects consumer resilience.

Economic Landscape in the Industrials Sector

Several disruptions, notably the midyear port strikes at major global trading hubs, adversely impacted supply chains, leading to heightened transportation expenses and logistics challenges. These disruptions resulted in product shipment delays, inventory deficiencies, and increased operational costs across industries such as retail, automotive, and manufacturing, thus exposing vulnerabilities in global supply chains.

Despite these hurdles, construction spending surged by 4.3% year-over-year, supported mainly by the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA). With total construction investments reaching $2.2 trillion, the momentum in construction remains vital for the broader industrials landscape.

The Role of Private Equity in M&A Activity

Private equity firms actively participated in the M&A market, deploying unutilized capital for platform and add-on acquisitions. However, ongoing geopolitical tensions, a stringent regulatory atmosphere, and the aforementioned supply chain disruptions significantly influenced strategic decision-making for M&A among industry players. In 2024, 58.6% of M&A transactions were classified as strategic, indicating a preference among acquirers for platform acquisitions over purely financial investments, which accounted for 41.4% of deals.

Sellers exhibited reluctance in adjusting their price expectations, leading to valuation discrepancies that hindered transaction completions. Despite a declining trend in M&A valuations, with an average of 9.0x EV/EBITDA recorded, certain sectors such as Engineered Products (18.1x) and HVAC (17.1x) managed to thrive amid favorable market conditions. Conversely, traditional sectors, including Environmental Health & Safety (11.6x), Metals (7.5x), and Chemicals (7.3x), faced downward pressure on valuations.

Future Outlook and Trends in M&A Activity

Capstone’s report also delves into the sectors that stood out against the rest of the industrials industry in 2024 and are likely to attract buyer interest in 2025. With robust customer bases and innovation opportunities, certain segments are positioned for growth and diversification through strategic acquisitions. The report encapsulates trends shaping M&A activities within the industrials realm and provides a thorough breakdown of nine highlighted sectors, including Chemicals, Engineered Products, and Waste Recycling.

This report serves as a vital resource for stakeholders aiming to understand the evolving landscape of the industrials sector amid economic fluctuations. For comprehensive insights, the full report can be accessed through Capstone Partners' official channels.

About Capstone Partners

With a 20-year legacy, Capstone Partners has built a reputation as a trusted advisor for middle market enterprises, providing a suite of investment banking and financial advisory services, including M&A advisory, corporate restructuring, and valuation services. Headquartered in Boston, the firm operates through multiple U.S. offices, leveraging industry-specific expertise across various sectors.

For further information, visit Capstone Partners.