INDUSTRIAL TECH SUMMARY & OUTLOOK M&A TRENDS

Ongoing economic uncertainty and market instability continue to affect investor confidence causing M&A activity during the first quarter of 2023 to decline. Industrial tech M&A totaled 94 acquisitions, representing a 33% decrease from the 141 deals in the fourth quarter of 2022.

Despite these challenges, our outlook remains cautiously optimistic for M&A activity as private equity and strategic acquirers alike remain committed to their inorganic growth strategies. Dealmakers view the landscape positively, actively targeting complementary companies and in a less frothy valuation environment.

Favorable targets include those which possess the following qualities:

• Consistently high-performing

• Favorable sector positioning

• Perceivable recession resistance/resilience

Although lacking some of the tailwinds from the past few years, M&A remains an integral part of strategic landscapes. In the lower middle market, add-ons are in favor to support existing investment theses and debt requirements, relative to the middle market, are often less impactful. Still, the quality of companies brought to market is viewed as a challenge to buyers. As such, deal scarcity favors highquality sellers and is cause for acquirers to remain competitive when valuing highly sought after assets.

Industry Commentary

“Specifically, we will balance efficiency moves with growth opportunities. Think of that as better and bolder. We will stop certain initiatives and accelerate others thereby increasing investment in our business. Relative to 2022, we are increasing our 2023 expense and capital budget by over $900 million. Finally, we will focus on three widely important initiatives - improving the customer value proposition, increasing talent development and employee engagement, and leveraging our physical network with our digital platform to drive logistics-as-a-service.”

– Carol Tome, UPS CEO

"One of the main themes in global business in 2023 will be expectations. For example, the long sought-after supply chain visibility is here in so many ways; and board rooms now expect their business leaders to do something with it”

– Scott Luton, Supply Chain Now CEO

“I can’t ship a thirty-thousand-dollar car, I have to idle a plane to Detroit to the Midwest because of a two-dollar semiconductor component?

Unacceptable… We aggressively need to rebalance the supply chain”

– Pat Gelsinger, Intel CEO

M&A ACTIVITY IN THE SUPPLY CHAIN AUTOMATION SPACE

Supply chain operations experienced improvements in Q1 demonstrated in part through port operation stabilization and the regulation of freight container costs. With that said, general disruption and uncertainty are expected to remain ongoing concerns in the coming quarters with inflation, fluctuating consumer demand, increased labor costs, and geopolitical issues continuing to negatively impact the supply chain process. As consumers experience the effects of shortages of essential goods, supply chain leaders are encouraged to turn their focus to improving operations through strategic investments.

Warehouse automation is a focal point of viable warehouse improvements as labor shortages and wage pressures perpetuate the need for an alternative to labor-intensive warehouse tasks. As e-commerce grows, technologies to boost logistical warehouse performance gain the spotlight. Robotics, which can assist in the picking and sorting functionality of warehousing needs, should be the main focus of decision makers as they replace the most people-intensive tasks, therefore producing the greatest return on investment.

Poor inventory management can have adverse effects on manufacturing businesses. The warehouse automation market is thriving as pressure from consumers necessitates advancements. Effective inventory management systems can use stock to determine actual versus predicted demand while reducing human error. From a liability standpoint, automation behaves remarkably well. The risks of error and injury are reduced by automating repetitive, time-consuming tasks.

Value in the supply chain M&A market is driven largely by the opportunities for operational synergies, cash flow improvements, and margin expansion. Overseas partnerships that have historically yielded cheap options have become less reliable. As business leaders look for more permanent solutions to long-term concerns, facilities are moving closer to home to lessen the distance between customers and suppliers, even if it means additional cost. The emphasis on reliability through partnerships invites M&A to serve as a solution to new world challenges.