Industrial Distributor M&A Pulse – Q3 2016

The third quarter of 2016 was a relative bright spot for the industrial distribution M&A market amidst an assortment of challenging economic indicators. Deal volume, which had increased more than 13.0% on a compounded basis from 2010 to 2015, decreased 12.0% for year-to-date September as compared to the same period for the prior year. This indicates an uptick in deal activity since June, when industrial distribution deals were down 15.0% year-to-date. The number of deals occurring in the broader M&A market continues to trail 2015 figures, although aggregate deal value remained relatively firm due to larger companies changing hands and an increased reliance on M&A activity to drive growth in a tepid organic growth environment.

The macroeconomic environment has been mixed since June, with the Industrial Supply Association’s Distributor Index, for example, decreasing 9.2% since August, but settling at 57.1, far above its trailing twelve-month low of 44.9 in July.* The Federal Reserve’s Purchasing Manager Index also fell off from a peak of 53.2 in June, but remains at 49.4, just barely below the 50.0 threshold indicating an expansion. The Institute for Supply Management’s Production Index is also down year to date, but improved in September to finish at 49.5, also just below the expansion threshold.

In summary, the industrial distribution market has softened. Major players are experiencing softening sales volume and do not expect this to change in the near future. With this difficult climate, distributors are focusing on cost controls, and maintaining profit margins. These trends, along with the availability of capital, help explain why industrial distributors are continuing to pursue inorganic growth via acquisition.

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