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Precision Manufacturing Market Update – January 2024
Valuations Normalize in the Precision Manufacturing Market Drawing Buyer Interest
M&A activity in the Precision Manufacturing market exhibited a modest decline of 6.4% year-over-year (YOY) in November 2023, with 191 announced or completed deals compared to 204 deals in the prior year period. Despite this decrease, the sector has demonstrated resilience compared to the broader merger and acquisition (M&A) markets, which experienced a 24.0% decline through 2023, as outlined in ESF Equity's Q4 2023 Capital Markets Update. Average disclosed multiples in the space have also experienced a YOY decline, attributed to the relatively lower availability of debt capital and the surge in interest rates. Presently, transaction multiples are averaging 1.7x EV/Revenue and 9.5x EV/EBITDA, marking a decrease from the 2.1x and 12.0x revenue and EBITDA multiples observed in 2022.
Technological advancements in addressable end markets such as Automotive, Medical Technology, and Electronics have remained key drivers of demand for Precision Manufacturing. The sector's fragmentation has attracted a vibrant pool of strategic buyers, who have been active in consolidating small- and medium-sized enterprises (SMEs) within the industry. Strategic buyers have dominated sector transactions, representing 66.5% of deals through year-to-date (YTD) 2023, compared to 57.8% in the prior year period. These strategic buyers have taken advantage of the depressed valuation environment, while private equity activity has decreased amid a high-interest-rate environment. Financial acquirers accounted for 33.5% of total deals in YTD 2023, a decline from 42.2% in YTD 2022.
Key End Markets Expand, Manufacturing Levels Moderate
The Precision Manufacturing market has exhibited resilience following a period of rapid growth post-pandemic, indicating defensibility in its fundamentals. Manufacturers' new orders for ferrous metal foundries and fabricated metal products have shown consistent growth, while overall new orders have normalized and inventories have remained healthy. These factors are expected to create a favorable environment for manufacturers that experienced a decline in demand earlier in 2023.
Heading into 2024, a continued resurgence in orders is anticipated, supported by sector optimism reflected in the growth of the Industrial Select Sector SPDR Fund (ARCA:XLI). As macroeconomic challenges in other regions lead manufacturers to focus on domestic operations, the demand for precision manufacturing is expected to rise, prompting industry players to explore both organic and inorganic growth opportunities to meet increasing demand.
Consumer demand for Precision Manufacturing products remains robust, driven by key end markets such as Electronics, Healthcare, Automotive, Aerospace, and Defense. Sanmina Corporation, a global manufacturing solutions provider, reported significant revenue growth in Q4, fueled by demand in segments like Semiconductor Lithography Equipment, Medical, and Automotive. Additionally, government funding initiatives, such as the BEAD program aimed at expanding broadband networks, present long-term growth opportunities, encouraging businesses to pursue strategic growth strategies.
Industry 4.0 Expected to Require Greater Precision, Fueling Acquisition Activity
The Fourth Industrial Revolution has ushered in a fully integrated ecosystem of manufacturing capabilities, where precision and accuracy are paramount across various end markets like Electronics, Healthcare, Automotive, Aerospace, and Defense. Companies demonstrating such capabilities are attracting healthy buyer appetite, as reflected in notable transactions outlined below:
1. TechPrecision Corporation's Acquisition of Votaw Precision Technologies (November 2023, $110 Million): TechPrecision (Nasdaq:TPCS) announced its acquisition of Votaw Precision Technologies, a manufacturer of precision components for Aerospace, Defense, and Commercial industries, for $110 million. This strategic move is expected to double TechPrecision’s revenue and EBITDA while enabling cost savings through operational synergies. Votaw's expertise in highly engineered precision components aligns well with TechPrecision's focus on Naval, Aerospace Defense, Nuclear, and Medical Systems.
2. Dubal Holding's Acquisition of Thermalex (November 2023, Undisclosed): Dubal Extrusion Investment (DEI) acquired Alabama-based Thermalex, specializing in multiport extruded tube (MPE), a critical component in Automotive and HVAC sectors, particularly in the Electric Vehicle (EV) markets. The acquisition expands DEI’s North American operations and positions Thermalex to meet the rising demand for specialized products from EV manufacturers.
3. AMETEK's Acquisition of Paragon Medical (October 2023, $1.9 Billion, 3.8x EV/Revenue): AMETEK (NYSE:AME), a global leader in electronic devices manufacturing, acquired Paragon Medical, a manufacturer of highly engineered medical instruments, for $1.9 billion. This acquisition enhances AMETEK’s presence in the Medical Technology space by adding new market segments, geographies, and a diverse blue-chip customer base. Paragon’s product portfolio, including orthopedics, minimally invasive surgery, robotic surgery, and drug delivery, complements AMETEK’s existing capabilities and is expected to contribute significantly to its earnings.
These transactions underscore the growing importance of precision manufacturing capabilities in meeting the evolving demands of various industries, driving strategic acquisitions to enhance product offerings, expand market reach, and capture emerging opportunities in the Fourth Industrial Revolution.