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Global EngineeringSector Review 2011

Sector Review 2011

ContentsReport 2

Introduction 3

Report Highlights 4

Deal Focus by Country

Contacts 38

Transactions 40

AmericasBrazil 6

Canada 8

Mexico 10

USA 12

Asia and AfricaChina 14

India 16

Japan 18

South Africa 20

EuropeGermany 22

Italy 24

The Netherlands 26

Poland 28

Russia 30

Scandinavia 32

Spain 34

United Kingdom 36

Sector Review 2011

Report

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About the report

Deal Focus

This sector report was coordinated by theCatalyst Corporate Finance research team onbehalf of the international Mergers Alliancepartnership. To compile our findings weconducted interviews with our sector expertsin each member firm within the Mergers Alliancepartnership.

We also surveyed owners and senior executiveswithin engineered product sector organisationsand private equity investors worldwide.

Within each country’s Deal Focus we reviewmerger and acquisition (M&A) activity, focusingon key deals and trends within the engineeringsector defined as including those businesseswith activities involved in the production ofengineered products. Engineered products willtypically require a high design input, ongoingproduct innovation and development and will bemanufactured to a high level of precision. Wealso include a table of recent transactions wherethe target company is located in the countryunder review.

Additionally, we provide an overview ofthe engineered product sector as a whole,highlighting the market structure as wellas commenting on the key trends and thefactors influencing M&A. We end by providingpredications for M&A in the sector overthe course of the next 18 months.

DisclaimerThis publication contains general information and is not intendedto be comprehensive nor to provide financial, investment, legal,tax or other professional advice or services. This publication isnot a substitute for such professional advice or services, and itshould not be acted on or relied upon or used as a basis for anyinvestment or other decision or action that may affect you oryour business. Before taking any such decision you shouldconsult a suitably qualified professional adviser. Whilst

reasonable effort has been made to ensure the accuracy ofthe information contained in this publication, this cannot beguaranteed and neither Mergers Alliance nor any of its memberfirms or other related entity shall have any liability to any personor entity which relies on the information contained in thispublication, including incidental or consequential damagesarising from errors of omissions. Any such reliance is solelyat the user’s risk.

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Sector Review 2011

Introduction

We also examine how the ownership structureof engineering firms in continental Europe willprovide ongoing M&A opportunities forstrategic and private equity acquirers.

As the global recovery takes hold, we at MergersAlliance are ideally placed to help you. Whetheryou seek growth through acquisition, wish torestructure or realize value in your business, ourinternational advisors are in a unique positionto help you – Local knowledge…Global reach.Our member firms have a prominent position inboardrooms across the world and are renownedfor delivering award winning partner-led advisoryservice with seamless international cooperation.

We hope you enjoy reading our report andwelcome any thoughts or additions you mightlike to contribute.

In our own specialism of corporate mergers andacquisitions (M&A), engineering transaction levelsduring the first half of 2010 are showing signs ofrecovery following a torrid 2009. As tradingvisibility improves for the larger engineering firmswe expect buyer confidence and, in due course,transaction levels to rise.

You will find in our report a great deal of market-leading insight into the key issues facing thesector in 2010 and beyond including: howengineering firms in developed economies havecreated positions of clear leadership in keysub-sectors, the demand challenges facingengineering firms in emerging economies and thewide ranging implications of recent governmentpolicy developments on the engineering sector.

Our work also highlights the key role of the BRICnations in the globalisation of the engineeringsector and in the shaping of M&A strategies ofWestern buyers.

Philipp von HochbergCH Reynolds Corporate Finance+49 699 740 3060p.hochberg@chrcf.com

At the time of writing, economies around the world areemerging from the aftermath of the global recession andare on a fragile path to recovery. As you will see from thecontributions by our sector experts across the world it isclear that this year and next will bring both opportunitiesand further challenges for those of us operating in theengineering sector.

Sector Review 2011

Report HighlightsWe at Mergers Alliance believe the main factors to shape M&Ain the engineering sector over the next five years will be:

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USAUS buyers are a dominant force inoutbound M&A and are now focusingon emerging growth markets. However,when acquisition rationale is primarilyIP driven, they still gravitate toengineering-rich developed countries

BrazilAs the economic engine of LatinAmerica, Brazil is an attractiveemerging market. EngineeringM&A will be focused on thosebusinesses which support thenatural resources sector

UKOver half of all engineering deals havebeen in sectors where the UK hasestablished significant comparativeadvantage; aerospace, oil & gas andautomotive components

SpainSpanish engineering firms are expandingoverseas, particularly those involved inthe traditionally strong power generationand automotive sectors

ItalyThe medical equipmentengineering sub-sector has seensignificant growth, attractingsome $2.5bn of M&A investmentover the last five years

Engineering leadership

Engineering firms, particularly those from developedeconomies, have created positions of leadership inspecific engineering sub-sectors. This advantage hasbeen borne out of decades of innovation through R&D,constant refinement of their global supply chains androbust trading track records. Countries which havedeveloped clear engineering leadership include;Germany in industrial machinery, Japan and Spain inautomotive, the US in defence and the UK in aerospace.

Globalisation

The globalisation of the engineering sector has resulted ina significant increase in cross-border M&A volumes overthe past 20 years. During this period, US companies havebeen by far the most dominant acquirers of overseasengineering businesses. Acquisitions have been drivenby US buyers wishing to access new products andtechnologies, geographical markets and to gainexposure to higher growth regions.

RussiaState-owned engineering firms will beimportant players in the M&A market asthe government seeks further influencein strategically important sub-sectors

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Government policy

Following the recession, many countries have emergedwith new or chastened governments in office. Newpolicies have been developed to address budget deficitsand debt repayment plans, predominantly throughausterity measures. Some governments are reverting toprotectionist policy in order to defend key sectors,including the use of subsidies, state sponsoredconsolidation and currency controls to ensure theirexporters remain competitive. Policy has also contributedto supporting new markets, especially renewable energy,and almost all governments now have a ‘green’ policy.Whatever the policy direction taken, we see this having animportant effect on M&A within the engineering sector.

Ownership structure

Beyond the large engineering conglomerates which servea number of engineering sub-sectors, the market remainsfragmented with a large number of SMEs. These firms areoften family owned and focused on a specific engineeringniche. This trend is particularly strong in continentalEuropean countries such as Germany and Italy, wherethere are a number of highly attractive M&A targetsfor domestic and overseas acquirers as well as privateequity investors.

Emerging economies

The growth in the emerging BRIC economies has createda demand for engineering products which cannot besatisfied by local engineering companies alone. Massivepublic infrastructure investment, growth in the naturalresources sector, rapid expansion in consumer spendingand booming export markets are all driving demand.To fully capitalize on the opportunities, engineering firmsare acquiring new technologies, establishing additionalproduction capacity and partnering with global players.

Infrastructure development

The scale of global infrastructure investment isunprecedented and the engineering industry will bepivotal in the delivery of these projects. In emergingeconomies, new infrastructure is needed to supportdevelopment and in developed economies countriesthere is a pressing need to replace existing, obsoleteinfrastructure. Around the world engineering expertiseis increasingly in demand and is stimulating globalM&A across the industry.

ChinaEvolving government regulation of the M&Amarket in China will lead to increased inboundand outbound M&A activity

GermanyGerman Mittlestand companies willcontinue to be attractive mid-market M&Atargets to domestic and overseas tradeacquirers as well as private equity

IndiaIndian engineering firms will seek toacquire technology and engineeringexpertise to transfer into their homemarket

JapanA contracting domestic market is forcingJapanese engineering firms to look overseasand acquire exposure to growing internationalmarkets

M&A activity on the rise

M&A activity across the whole of the Brazilian economyis at record levels with over 350 deals announced up toSeptember 2010. M&A activity in the engineering sectorhas however been modest and is unlikely to reach thepeak of 2008 but nevertheless is rising. Despite this loweractivity level, valuations finally appear to be on the rise,which is a promising development and likely to impactpositively on M&A in the sector over the next year.

Many Brazilian engineering companies have attractedinterest from foreign buyers, especially from the US andWestern Europe, and as a result almost half of allengineering deals over the last four years have involvedoverseas acquirers. The acquired companies supplyproducts into a variety of end markets, often theautomotive sector but increasingly the oil & gas market.Brazil is rich in resources such as iron ore, bauxite andpetroleum and is therefore particularly appealing tointernational companies who are increasingly seekinginvestments in resource-rich countries.

Brazilian engineering expands itsgeographic footprint

There continues to be interest in outbound M&A witha number of active Brazilian acquirers looking to buyforeign businesses to expand their geographical footprint.This year Brazilian machine tool maker Industrias Romioffered $110m to acquire Hardinge Inc, a tool makerbased in New York and owner of the renowned

Bridgeport marque. Whilst the approach was rebuffed,Romi CEO dos Santos argued at the time “that acombined company will have the scale to invest instrategic opportunities to expand in emerging markets”.

Other buyers include Lupatech, a publically listedproducer of industrial valves and micro casting parts forthe oil & gas sector. The company has been seekingtargets across Latin America to expand its productportfolio. In late 2007, Lupatech, together with Frenchprivate equity firm Axxon Group, acquired Argentinabased Aspro, a supplier of equipment for compressingnatural gas for $85m. WEG, another listed Brazilianmultinational, producer of electromechanical andelectronic systems, is currently looking for targets withinthe emerging markets and has acquired Instrutech(Brazil), Voltran (Mexico) and Zest Group (South Africa)within the last three months.

This trend for Brazilian outbound acquisitions is likelyto continue due to the relative cash strength of Braziliancompanies, a booming capital market and the relativestrength of Brazilian banks which have opened creditlines for this type of deal.

Deal Focus

BrazilCapital City: Brasília Population: 198,739,269

Area: 8,511,965 sq km Time zone: GMT -3

“Leading Brazilianengineering companiesare seeking to expandtheir global footprints,

particularly in Latin Americanand emerging markets, so weexpect to see an upward trendin outbound M&A over the nextfew years”

Leonardo Antunes, BroadSpan Capital

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Total deal volume

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M&A activity

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Consumer inclusion driving growth

Brazil is the economic engine of Latin America andaccounts for at least half of the M&A in the region. It hasbeen amongst the most resilient of global economiesduring the downturn as a result of lower levels ofcorporate and consumer debt, which have allowedcompanies and individuals to deal better with theeffects of the financial crisis.

Brazil’s economy has continued to expand in 2010 and isexpected to grow by 7% this year. This growth is beingdriven by domestic consumption and is benefiting frommillions of people emerging from poverty to join theconsumer classes. Brazil’s process of consumerinclusion means that more than 40m people areeither joining the consumer base or moving toa higher level of consumption.

Automotive and oil & gassectors key

Economic development is forcing the country toexpand its production capacity especially in sub-sectorssuch as automotive manufacturing and oil & gasextraction/processing.

Brazil has received substantial investment fromautomotive manufacturers, particularly from Asia, whohave installed production plants to capitalize on theGovernment’s fiscal incentive schemes to increase carsales. This development has directly influenced therecent high growth rates in the autoparts segment.

Growth in the oil & gas sector has been underpinned byrecent oil discoveries by Petrobras in the waters off theBrazilian coast. As the main player in the market,Petrobras dictates the shape of growth in the sector andis planning investments of c.$174bn to 2013, representingan annual increase of 55% compared to their previousfive year plan. This commitment by Petrobras will result insignificant growth for suppliers of engineered productsand should ultimately lead to increased M&A in the oil &gas engineering sub-sector.

Predictions

The trend for foreign companies to acquire Brazilianengineering firms is set to continue in parallel withgrowth of the wider economy

Overseas investment by Brazilian engineering firmsis driven by a desire for geographic expansion,especially in Latin American and emerging markets

The oil & gas and autoparts segments will remainthe most active engineering sub-sectors for M&Ain the next two years

Date Target Description Acquirer Deal Value(US$m)

Jun-10 MWL Brasil Wheels and axles Goergsmarienhuette n/dRodas & Eixos (Germany)

Jun-10 CanberaPumps Pumps ITT Corp (USA) n/ddo Brasil

Apr-10 Eletrônica Loudspeakers Harman n/dSelenium International (USA)

Dec-09 Hiter Industria Valves Tyco Flow n/de Comercio Control (USA)

Nov-09 Mueller Mineira Plastic Magneti Marelli n/dcomponents (Italy)

Aug-09 Certain operations Steel wheels Iochpe-Maxion 180of ArvinMeritor

May-09 Romicron Boring tools Kennametal (USA) n/dProducts

Apr-09 Meridian End modules and Citadel Plastics n/dAutomotive Brazil signal lighting Holdings (USA)

Jan-09 Flywheel business Flywheels Brembo (Italy) 4of Sawem

Nov-08 Vanzin Industrial Automotive parts Tuper n/dAuto Peças

Recent transactions

Consistent transaction volumes

M&A transaction volumes in the Canadian engineeringsector have remained resolutely flat over the last threeyears with 20 to 25 transactions per annum. The averagetransaction value however has fallen significantly from$50m to just $12m during the first half of 2010 as thesector saw only a handful of very small transactionscompleted.

The sharp peak and trough in M&A volumes that hascharacterized the sector in many countries did not occurin Canada. This is partly due to the sector being relativelysmall in comparison to Canada’s primary resourcessectors but also due to Canadian corporate fiscalconservatism, which prevented the M&A market over-heating as it did so spectacularly in other economiesaround the world. Canada's major banks emerged fromthe financial crisis of 2008-09 among the strongest in theworld, owing to the country's tradition of conservativelending practices and strong capitalization.

Rich target for US buyers

The majority of transactions were cross-border withinternational buyers acquiring 43 Canadian engineeringbusinesses in the last three years accounting for 53% ofvolume and 77% of value. This is explained by the fact

that US buyers, despite having similar strategic M&Arationales to domestic Canadian acquirers, are classedas overseas buyers.

In the past, many Canadian engineering firms wereconsidered as targets for large, international acquirers.This trend is expected to reverse as the strength of theCDN$, robust corporate balance sheets and the health ofthe Canadian credit markets enables domestic acquirersto competitively engage in outbound M&A.

One such corporate is ATS Automation Tooling Systems,a manufacturer of automation products. In March ATSannounced the proposed $62m acquisition of Germangroup Sortimat. Based in Stuttgart, Sortimat is amanufacturer of specialized assembly systems formedical products and pharmaceutical dosing devices,achieving revenues of c.$80m in 2009. The acquisitionsupports ATS’ strategy to expand its position in the globalautomation market and enhances growth opportunities inthe key strategic segment of healthcare.

Economy tied to natural resources

The majority of Canada’s GDP is tied to the resourcessectors (oil & gas, mining, agriculture and forestry) as thecountry continues to exploit its enormous reserves ofnatural resources. Canada is the US's largest foreignsupplier of energy, including oil, gas, uranium, and electricpower. Given its great natural resources, skilled labourforce, and modern capital plant, Canada enjoys a uniqueposition as one of the US’s most important trading

Deal Focus

CanadaCapital City: Ottawa Population: 33,487,208

Area: 9,984,670 sq km Time zone: GMT -5

“In the past, manyCanadian engineeringfirms were consideredonly as targets for large,

international buyers. This trendis expected to reverse as thestrength of the CDN$, robustcorporate balance sheets andthe health of the Canadiancredit markets enables domesticacquirers to competitively engagein outbound M&A”

Darren Williams, Solaris Capital Advisors

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Total deal volume

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M&A activity

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partners. However, the specialist equipment andmachinery used in these end markets is predominatelymanufactured by overseas companies, with Italian andGerman manufacturers monopolizing supply.

The province of Ontario is Canada's leadingmanufacturing region, accounting for approximately halfof total national manufacturing shipments and is also amajor centre for the natural resources industry. In March2010, The Government of Ontario proposed sweepingnew legislation to attract investment in renewable energytechnology and create new ‘green economy’ jobs. Theproposed bill, the Green Energy Act (GEA), if passed,will provide significant revenue incentives for businessesestablishing and growing renewable energymanufacturing capabilities in the province. Firms such asCanadian Solar, Arise Technologies and of course ATS arelikely to be major benefactors from this new legislation.

Dominant global players

Engineering sub-sectors in which Canada does possessworld leading capabilities include automotive (MagnaInternational), aerospace (Bombardier) andcommunications (Research In Motion).

Ontario based Magna International is one of the world’slargest and most diversified Tier 1 automotive componentsuppliers, generating $17bn revenues annually. Magna’ssuccess has been built on the diversity of its productoffering and the ability to serve OEM clients ona global basis. This success has been supported bystrategic international M&A activity. Recent deals includethe acquisition of Karmann of Japan (manufacturer ofconvertible roofs) and Cadence Innovation of the CzechRepublic (automotive interior and exterior plasticcomponents and systems). With a net cash position of$1.5bn, Magna clearly has the fire power to continuemaking acquisitions and has stated its intention to pursuedeals in the emerging markets of India, Russia, SouthAmerica and China over the coming years.

Predictions

The combination of strong balance sheets,functioning credit markets and a relativelystrong CDN$ will enable major corporates tocontinue be competitive in acquiring overseas

Many larger, global players have M&A strategiestargeting the emerging BRIC economies

The US will continue to be a major inward investorin Canada across a broad range of engineeringsub-sectors

Date Target Description Acquirer Deal Value(US$m)

Aug-10 Micro Thermo Refrigeration Parker Hannifin n/dTechnologies controls (USA)

Jul-10 G&B Specialities Rail signal Wabtec 35products (USA)

Jun-10 Macro Components for Dalian Rubber & 9Engineering plastic film industry Plastics (China)

May-10 Motor Business DC electric motors Bison Gear & n/dof Von Weise Engineering (USA)

Apr-10 NSE- Machinery and NSE Aero n/dAutomatech equipment North America

Apr-10 Routes Aerospace COM DEV 1.5AstroEngineering instrumentation International

Mar-10 Celco Controls Automated control High Road Capital n/dsystems Partners (USA)

Feb-10 Arpeco Printing machines Mark Andy (USA) n/dEngineering

Nov-09 Composotech Composite Oneworld Energy n/dStructures Inc structures

Oct-09 Coretec Printed circuit DDI Corp (USA) 23.4boards

Recent transactions

Deal volumes recover in 2010

As a result of the global crisis and shortage of credit,Mexico like most other countries around the worldsuffered the effects of the global recession. Engineeringtransactions remained at a relatively constant level during2007 and 2008, dipped in 2009 and have recovered in thefirst half of 2010. With more deals completed in H1 2010than the whole of 2009, we are expecting a return to pre-crisis levels for the full year. So far however average dealvalues have remained fairly constant over the period.

Clear interest from Europe and the US

Around three quarters of all deals done in the Mexicanengineering sector typically involve foreign buyers. Theseacquirers have tended to come from developed countries,particularly Western Europe and Mexico’s neighbouringcountry the USA.

EMTE, a Spanish engineering company specialising inclean-room technology, acquired Eolis América Latina tofurther consolidate its position in Latin America. With thispurchase, EMTE revenue base is now over $60m andit employs a team of 300 people worldwide. Mexico,as well as other Spanish speaking countries in LatinAmerica are clearly attractive markets to Spanishcompanies like EMTE and hence the high level ofinbound M&A from Spain.

US companies are also routine investors in the Mexicanmarket, both at a ‘greenfield’ level and throughacquisition. Thanks to Mexico’s membership of NAFTA itis allowed to trade freely with the US and Canada andalso has free-trade agreements with more than 30 othercountries including members of the European Union andJapan. A key reason underlying much of the foreigninvestment within Mexico has to do with the country’sextensive network of these free trade agreements anddouble taxation treaties, with respect to corporation tax.

Latin American expansion

The MERCOSUR trade agreement also has a positivebearing on Mexican interaction with Latin America. WEG,a Brazilian engineering multinational, recently invested inVoltran, a Mexican transformer manufacturer, taking acontrolling stake of 60% in the business. The partnershipbetween the two companies began in 2006, when WEGacquired a 30% stake in Voltran from the controllingshareholders, the Jimenez family. Voltran manufacturespower and distribution transformers and recordedrevenues of around $70m in 2009. WEG’s CEO claimed"the acquisition brings synergy gains which will allow ourprogress in the local production of new lines, such as drytransformers and to supply more complex solutions, suchas power substations.”

Deal Focus

MexicoCapital City: Mexico City Population: 111,211,789

Area: 1,972,550 sq km Time zone: GMT -6

“Although the Mexicanengineering market isrelatively small at themoment, the development

of global industries such asautomotive and aerospace withinthe country will ensure the sectorscales up by 2020”

Luis Garcia, Sinergia Capital

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Total deal volume

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M&A activity

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Auto industry relocating to Mexico

Despite the tough trading conditions within the worldwideautomotive industry, the sector remains attractive inMexico. A number of international OEMs continue torelocate production facilities to Mexico to benefit froma lower cost base. Exports of vehicles from Mexicointernationally have increased over the last five yearsand strategic and institutional investors continue toinvest incrementally.

One of the most notable automotive deals was the $75macquisition of Nugar, a producer of autoparts, by a jointventure between DESC and Spanish firm CIE Automotivein 2007. The transaction allowed the DESC–CIE jointventure to strengthen its position within the industry andtake advantage of the gradual relocation of automotiveindustry suppliers to Mexico. CIE Automotive thenacquired the 50% it did not already own from jointventure-partner Grupo Kuo SAB de CV (formerly DESC)for $90m in a deal which ultimately completed in early2009. In the meantime CIE Automotive made theacquisition of Pintura y Ensamble for $33m, securingits two production plants based in Saltillo and deRamos Arizpe.

Many of the engineering sector’s M&A transactionsinvolve companies supplying into the automotiveindustry and we believe this will continue over thenext two years.

Suppliers to aerospace OEMs

As a result of Mexico’s membership of NAFTA and itsincreasing reputation for quality certified production andcost competitiveness, local aerospace manufactures arenow suppliers to major OEMs including Boeing, Airbusand Bombardier. This development means that Mexiconow ranks as one of the Top 10 largest suppliers ofaerospace products to the US market, above manyleading Asian suppliers such as China and South Korea.

Whilst M&A activity in this sector is low at present, it isinevitable that consolidation will occur at some point asfirms seek to grow through acquisition or look toeliminate competition.

Predictions

Given the low starting point, it is unlikely thatthe Mexican engineering sector will generatesubstantially more M&A transactions in theshort term, however the trend is upwards

We will continue to expect greater inboundM&A than outbound, especially by companieslocated in the US, the European Union and Brazil

The growth in the Mexican aerospace andautomotive industries will inevitably lead toincreased investor interest in the sector, whichwill translate to some extent into M&A activity

Date Target Description Acquirer Deal Value(US$m)

Jul-10 Eolis América Air treatment COMSA EMTE n/dLatinacontrols systems (Spain)

May-10 Spirax-Sarco Steam products Spirax-Sarco 15Mexico and pumps (UK)

May-10 Voltran Power WEG (Brazil) n/dtransformers

May-09 CIE DESC Automotive parts CIE Automotive 90Automotive (Spain)

May-09 CarMex Automotive parts HP Pelzer n/d(Germany)

Mar-09 Pintura y Automotive parts CIE Automotive 33Ensamble (Spain)

Sep-08 Alpe SA Electric heating NIBE Industrier 25elements (Sweden)

Jun-08 Clemex Mexico Engine bearings MAHLE GmbH n/d(Germany)

Apr-08 Damy Cambios Railroad VAE Nortrak (USA) n/dde Via components

Nov-07 Hermosillo Plant Interior auto IAC North America 17components (USA)

Recent transactions

A return to pre-crisis M&A volumes

First the good news: after overcoming the worst yearfor M&A in a long time, 148 engineering deals wereannounced during the first two quarters of 2010.On a pro-rata basis, 2010 is on track to achievea similar number of transactions to 2007. It appearswe have returned, to some degree, to pre-crisis levelsof M&A activity.

However, valuations and average transaction size areentirely another story. The value of engineering M&A in2010 stands at $8.9bn so far, considerably below the$30.8bn achieved in 2007. Average deal values havefallen by over a third to $162m this year as buyer appetitefor larger, riskier transactions has diminished andvaluation multiples lowered. This new environment ofattractive valuations for buyers and slowly adjustingexpectations of sellers has created great opportunitiesfor well-positioned strategic acquirers and opportunisticfinancial buyers.

Appetite for aerospace deals

In March, Triumph Group bucked the trend for smallerdeals by announcing 2010’s first mega-deal, the $1.6bnacquisition of Vought Aircraft from private equity investorThe Carlyle Group. Vought is a leading globalmanufacturer of aero structures for commercial, militaryand business jet aircraft and generated revenues of$1.9bn in 2009.

Vought's customer base is comprised of the leadingglobal aerospace OEMs and over 80% of revenue isfrom sole source, long-term contracts. The integration

of Vought with Triumph will create a leading Tier 1capable supplier with strong positions in commercialand military platforms.

From 1995 to 2010 aerospace sector multiples averaged11.5x EBITDA, peaking in 2007 at 14.3x. Since then,valuations have come down substantially. The Voughttransaction closed at 5.8x EBITDA, which is consistentwith the trend for substantially lower multiples across thewider US engineering sector.

Private equity in exit mode

The number of transactions involving private equity asproportion of total US engineering transactions hasdiminished steadily since 2007. Around 24% ofacquisitions in 2007 were completed by financialinvestors compared to 8% in the first half of 2010.Restricted conditions in the credit markets and continuingeconomic uncertainty have been the driving factorsbehind this sharp fall.

US private equity firms have hundreds of billions incommitted but uncalled capital that needs to be investedin the next three years or returned to investors. GeneralPartners are deeply incentivized to put this capital towork, so we expect private equity activity to pick up inthe next year. However, as strategic buyer appetitereturns, recent data suggests that the second quarterof 2010 was the most active three month period forUS private equity exits in nearly two years.

Deal Focus

USACapital City: Washington,D.C. Population: 307,212,123

Area: 9,826,630 sq km Time zone: GMT -5

“The global recessionhas helped US-centricengineering firms realizethe importance of

diversifying their marketsinternationally, thus diminishingtheir exposure to a singlegeography”

Horacio Facca, Headwaters MB

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Source: Capital IQ

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One such private equity exit was DLJ Merchant BankingPartners sale to Goodrich of DeCrane Holdings (CabinManagement Assets) for $280m. Goodrich paid justunder 8x EBITDA. Going forward, we expect Goodrichto continue to be interested in M&A opportunitiesparticularly as OEM production rates accelerate,Goodrich’s out of warranty installed base growsand aftermarket demand rebounds.

Geographic diversification animperative

Historically US acquirers have been the dominant forcein outbound M&A. The global recession has helpedUS-centric engineering firms realize the importance ofdiversifying their markets internationally, thus diminishingtheir exposure to a single geography. Many are now alsofocusing on politically-stable, Western-friendly countrieswith compelling demographics, such as Eastern Europe,Brazil and India. When the M&A rationale is primarilydriven by the need to access intellectual property, USfirms tend to gravitate more towards engineering-richcountries such as the UK, Germany and Japan.

Government policy will impactengineering sector

Highly-engineered products and processes account forabout 35% of the US GDP. Virtually all key engineeringsub-sectors have dominant, large, well-known USplayers, ranging from Boeing in aerospace andExxon Mobil in oil & gas to Raytheon in defense.Current government policy will have an impact inall these sectors.

In 2009, 30 Defense programs were cut yielding anestimated $330bn in future budget savings. Despite thesecuts, the US will remain the number one Defense spenderin the world, accounting for 41% of the top 15 worlddefense spenders worldwide.

The American Recovery and Reinvestment Act of 2009claims to be distributing $787bn across multiple USgeographies and industries with the twin objectives ofgenerating employment and revamping decaying USinfrastructure. The two sub-sectors that appear to benefitmost from the legislation are construction and energy,including nuclear power. Finally, the ban on offshoredrilling, which is due to expire at the end of Novemberwill inevitably have an effect on the oil & gasengineering sector.

Predictions

Surplus cash on corporate balance sheets in theUS, combined with compelling valuations point torebounding domestic M&A activity especially if theUS market turns more optimistic about the globaleconomic outlook

Inbound M&A is expected to continue, as favorablevaluations give overseas acquirers extra motivationto establish or expand their North Americanfootprints

The volume of private equity acquisitions isexpected to increase as committed capital isput to work over the coming year

Date Target Description Acquirer Deal Value(US$m)

Aug-10 Godwin Pumps Pumps ITT Corp 585of America

Jun-10 Vought Aircraft Aerostructures Triumph Group 1,600Industries

Jun-10 K-TEK Level detection ABB (Switzerland) n/ddevices

May-10 Ralph A. Hiller Nuclear actuators Rotork (UK) 8

Mar-10 Equipment Produces aerial Palfinger AG 25Technology lifts (Austria)

Mar-10 Eagle Tool Precision Heroux-Devtek 34& Machine machined tools (Canada)

Dec-09 Quincy Air compressors Atlas Copco 190Compressor (China)

Sep-09 Hi-Shear Pyrotechnic Chemring Group 132Technology Corp devices (UK)

Sep-09 Axsys Precision General Dynamics 643Technologies components

Jul-09 Certain assets Aerostructures Boeing Co 1,002of Vought

Recent transactions

Engineering M&A to reachrecord levels

Transaction volumes in the Chinese industrials /engineering sector have rebounded strongly during thefirst half of 2010 following a fall of 10% in 2009. On thebasis of H1 2010, engineering M&A on a pro-rata basis,is forecast to achieve record levels in 2010, representingapproximately a third of all M&A activity in China. Themoderate fall in M&A activity in 2009 and strong startto 2010 reflects how well the Chinese economy hasnavigated the global recession.

M&A activity in China has historically been driven bydomestic acquirers given the regulatory challengesinternational buyers faced when entering the Chinesemarket. Domestic consolidation is particularly prevalentamong engineering firms which provide equipment tosupport China’s huge public infrastructure developmentprogramme. However, as the regulatory burden lessens,inbound M&A from overseas acquirers in the engineeringsector has been on the rise, now accounting for a fifth ofall transactions. Overseas buyers are primarily attractedby the opportunity to acquire exposure to China’sstaggering GDP growth which has grown at a compoundannual growth rate of 10% over the past decade.

Investment in renewable energy

Transactions have occurred across all sub-sectors ofthe Chinese engineering sector. However, the long termgrowth potential in power engineering and renewableenergy has attracted significant recent interest. TheChinese wind power sector is forecast to grow rapidlyover the coming decade, in line with the government’s

plan to increase the total installed wind power basefrom 12 GW in 2008 to 150 GW by 2020. Recent dealsinclude, Hong Kong based private equity firm AffinityEquity Partners’ $200m buy-out of Beijing Leader &Harvest Electric Technologies, and GalaxySemiconductor’s $127m acquisition of ChengdeRuifeng Renewable Energy.

Acquisition of technology and brands

Outbound M&A activity by Chinese engineering firmsis primarily focused on acquiring technology andengineering expertise which can be transferred back intotheir domestic market. Chongqing Machinery & ElectricCo’s acquisition of UK based Holroyd Precision, amanufacturer of precision tools, is a prime example ofhow mid-market companies are being acquired for theirengineering know-how. Another interesting example wasChina International Marine Containers’ (CIMC) acquisitionof TGE Gas Engineering, a Luxembourg based specialistin bulk storage of refrigerated gasses for $50m. A dealthat was clearly beneficial to CIMC in terms of capturingintellectual property and expertise and also to TGE bygaining access to the valuable Far East commercialmarket of CIMC.

The acquisition of respected global brand names isanother important driver of large, outbound M&A.A recent example was Chinese car maker GeelyAuto’s acquisition of Volvo from Ford for $1.8bn.

Deal Focus

ChinaCapital City: Beijing Population: 1,338,612,968

Area: 9,596,960 sq km Time zone: GMT +8

“Chinese companies willincreasingly look aboardto acquire engineeringtechnology and expertise

which can be transferred backinto their domestic market”

Keith Pickering, Catalyst Corporate Finance

14

100

200

400

300

500

600

700

0510

20

40

3035

45

0

25

15

2007 2008 2009 H1 2010

Tran

sact

ion

volu

me

Ave

rag

ed

eal v

alue

$m

Source: Dealogic

Total deal volume

Average deal value $m

M&A activity

15

Continuing economic growth

Following the implementation of a two year, $586bneconomic stimulus package in 2008, the Chineseeconomy sustained impressive growth during the globaldownturn. The stimulus package delivered tax cuts andvastly increased spending on public infrastructureprojects including roads, railways, schools and hospitals.The stimulus package is widely expected to end in 2010as planned. The Chinese government is now takingmeasures to limit bank lending and dampen a rapidly overheating property market in an effort to control inflation.

China’s continued expansion through the recessionhas acted as a lifeline to many engineering exportingcountries. China’s demand for engineered goods tosupport the massive infrastructure build out and thecontinued growth in the country’s natural resourcessector has taken up the slack of reduced demand fromdeveloped economies. At a macro level, imports to Chinaincreased to $1trn in 2009, giving a ten year compoundannual growth rate of 20%.

Regulatory regime remains a hurdle

The regulatory environment for both inbound andoutbound M&A in China is evolving. In years gone by,regulation had been designed to restrict, even block,international investors in favor of domestic acquirers /investors. The government has now implemented anumber of initiatives to ease the regulation of the M&Amarket. Firms engaging in outbound M&A can nowbenefit from government subsidies and less restrictiveregulations when trying to securing acquisition financing.However, the regulatory burden remains significant, largeoutbound deals still require Chinese government approvalfrom five different government departments (six if thebusiness is a state-owned enterprise).

One area in which the regulatory burden has eased is forforeign private equity firms. Regulations have evolved toencourage foreign private equity firms to operate yuan-denominated investment funds. Funds representingdomestic investors face fewer regulatory obstaclescompared to overseas funds and this has translatedinto a sharp increase in fund commitments during thefirst half of 2010 which we expect to translate into dealflow in 2011.

Predictions

Chinese engineering M&A activity is expected tocontinue at a similar level, especially for businessesconnected to the country’s infrastructure build out

As regulatory hurdles soften over time, we expectthat inbound M&A will grow as a proportion ofoverall M&A

Chinese companies will be selective over overseasacquisition focusing on companies with leadingtechnologies or recognised brand names

Date Target Description Acquirer Deal Value(US$m)

Apr-10 Chengde Ruifeng Wind turbine blades Galaxy 127Renewable Energy Semiconductor

Apr-10 Hukai Electric High voltage LS Industrial n/dbreakers Systems (South Korea)

Feb-10 Tau Energy Heat exchangers Danfoss District n/dProducts Energy (Denmark)

Dec-09 Tieben Steel Co Metal components Jinsong Special 104Steel

Nov-09 Jiangsu Tieben Iron products Changzhou 29Iron and Steel Jiajiang Material

Nov-09 Shenzhen Power supplies New Energy 24Anytone Systems

Oct-09 Division of Crystal solar LDK Solar Co 21Best Solar modules

Oct-09 Beijing Leader & Motors and wind Affinity Equity 200Harvest Electric turbines (Hong-Kong)

Oct-09 Changzhou Marine cables Zhongli Science 22Marine Cable And Technology

Sep-09 High-Voltage High-voltage Nkt Cables 26Cable Factory cables (Denmark)

Recent transactions

High levels of M&A again in 2010

The Indian engineering sector continues to be buoyed byrobust internal consumption, which has encouraged bothinbound as well as outbound cross border M&A. Inboundacquisitions were generally made by European and USbuyers, however there are a number of Indian engineeringcorporates such as Mahindra & Mahindra who continue toacquire both at home and abroad.

Deal volumes and values in 2010 are expected to be inline with 2009 levels, although it appears that the averagetransaction values are on the rise, currently around $20mfor disclosed deals.

Accessing growth markets a priorityfor overseas buyers

One of the more notable transactions of early 2010, andthe largest to date, was the acquisition by Prysmian SpA,an Italian firm and one of the world’s leading cableproducers, of a majority stake in Ravin Cables for $37m.Based in Mumbai, Ravin is one of India’s leading cablemanufacturers and a key supplier to the power industry.

India is planning to add over 100 GW of capacity before2017 and Prysmian was clearly positioning itself tocapitalize on this infrastructure build-out. We expectfurther significant inward investment through acquisition(and JVs) across the power sector over the next threeyears especially of engineering businesses with interestsin transmission equipment such as cables, switchgearand transformers.

Going abroad

Whilst the Indian engineering sector is clearly full ofopportunities for growth, local firms face a numberof challenges in capitalizing on them. Larger foreignmultinationals operating in India are often better equippedto respond. Local firms may have little experience inexecuting large scale projects or may lack technologicalor process know-how. This has prompted several Indiancompanies to acquire overseas to address theseweaknesses.

Equally, the larger Indian corporates are seeingopportunities for growth beyond India, often in theemerging markets of Asia, Africa and South America andto a lesser extent in the developed economies. Mahindra& Mahindra, Crompton Greaves and Ashok Minda areprominent Indian engineering companies which havemade a number of acquisitions in the automotive, powerand aerospace sectors in recent years. Depressedvaluations due to the recent recession in the developedworld have increased the attractiveness of an outboundacquisition strategy.

Deal Focus

IndiaCapital City: New Delhi Population: 1,166,079,217

Area: 3,287,590 sq km Time zone: GMT +5:30

“With a GDP growth ratein excess of 8% in 2009and 2010, we have seenthe emergence of several

$50-$100m companies acrossthe engineering, power andmining sectors. These companiespresent good consolidationplatforms for global players andthere is growing acceptance ofthe merits of such alliances bythese domestic mid-sizedbusinesses”

Sapna Seth - Singhi Advisors

16

10

20

30

40

50

60

0

5

10

25

35

30

40

0

15

20

2007 2008 2009 H1 2010

Tran

sact

ion

volu

me

Ave

rag

ed

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alue

$m

Source: Mergermarket

Total deal volume

Average deal value $m

M&A activity

17

Engineering is a national focus

The Indian engineering sector accounts for c.12% ofIndia’s economy and it has been growing at a steadypace over the last decade. Long dominated by heavyengineering it is highly structured and technology driven.

An important feature of the engineering industry hasbeen its ability to spring off a whole sector of small andmedium enterprises, which become an important partof the supply chain due to their contribution to costcompetitiveness and employment generation. Despitethe global recession, the engineering sector continues togrow and the growth momentum is expected to continuefor the next few years primarily on account of thegovernment’s increased emphasis on infrastructure andindustrial development as well as engineering-led exports.

The Ministry of Commerce sponsored EEPC INDIA(Engineering Export Promotion Council) sets ambitioustargets for the total level of Indian engineering exports,and helps Indian engineering businesses penetrate newor expand existing export markets. This emphasis ongreater integration into the global marketplace has clearimplications for overseas M&A in the years to come.

Next decade of investments –energy, mining and ports

The planned infrastructure spending for the five yearplan ending in 2012 has been targeted at $500bn,which is likely to be doubled to $1trn in the followingplanning period. This planned infrastructure spendingis across all core sectors which directly influence theengineering sector.

In the previous decade substantial investments havebeen made in core infrastructure like roads, airports,oil & gas supply and telecom networks. Private equityinvestments alone in the past three years in infrastructurehave amounted to over $3bn.

The next decade however is expected to see substantialinvestment flowing into energy (generation, distributionand transmission), mining, water and waste treatmentand ports infrastructure. We have begun to see thisreflected in the recent trends in M&A and private equityinvestment in these sectors.

Predictions

The next decade in Indian engineering sectorbelongs to power and energy, mining, water andsewage treatment and port infrastructure. Thesesub-sectors will witness an increase in bothdomestic and cross-border M&A activity

Inbound transactions will continue to dominatethe total M&A deal activity. There will also besignificant joint venture opportunities for technicaland operational collaboration for large globalplayers from the developed nations

Average deal values will continue to increase due tothe incremental future opportunity. Companies withthe ability to participate and deliver mega projectswill attract higher valuation multiples

Date Target Description Acquirer Deal Value(US$m)

Jun-10 Parixit Agriculture Emtelle Holdings n/dIndustries irrigation systems (Netherlands)

Jun-10 Kartik Steels Castings Manoir Industries n/d(France)

Jun-10 Valves division Vacuum pumps Circor International n/dof Mazda and valves (USA)

May-10 Reva Electric car Mahindra & n/dElectric Car manufacturer Mahindra

May-10 Valeo Minda Automotive Valeo (France) n/dElectrical Systems components

Mar-10 RPG Cables Power and KEC International 25telecom cables

Mar-10 Pump business of Petrol and LPG Gilbarco 30Larsen & Toubro dispensing systems Veeder-Root (USA)

Jan-10 Sanfield Structural Maurer Sohne n/dprotection systems (Germany)

Jan-10 Standard Electrical Havells India 26Electricals distribution equipment

Jan-10 Ravin Cables Power cables Prysmian Spa 37(Italy)

Recent transactions

Stable M&A volumes

Despite the effects of the global recession, the Japaneseengineering sector has enjoyed stable levels of M&A inrecent years, with full year 2010 transaction volumesexpected to be similar to those of 2009. This sustainedlevel of activity has been due, in part, to larger firmsrestructuring, and mid-market firms acquiring to gainadditional scale to survive in Japan’s highly competitivedomestic market.

Average deal sizes have on the other hand been fallingrapidly, with 2010’s average value being nearly fivetimes less than in 2009. This decline can be attributedto expedited consolidation by SMEs and larger groupsmaking smaller infill acquisitions, rather than engagingin risky, larger transformational deals.

Cultural differences limitcross-border activity

Japan has traditionally seen very low levels of inboundM&A from foreign trade buyers or financial investors –typically less than 10% of total volumes. This low levelof activity is due to a number of issues, primarily thepersistent economic malaise often referred to as ‘Japan’slost decade’, but also due to perceived differences incultural and business practices. These issues can oftenlead to business integration and operational challengesfor the acquirer, which ultimately erodes value.

A recent notable exception to this trend was the $222macquisition of Hoya Corporation’s hard disk glass mediamanufacturing business by US firm Western Digital

Corporation in April. This deal was Western Digital’s firstacquisition outside the US and provides them withaccess to new R&D capabilities and exposure to keyAsian markets.

Asian buyers, particularly from China and India, havebeen interested in Japanese engineering firms, typicallylooking to gain access to their product technology, whichis often industry leading. Japan is considered moreattractive than the US, as fears of a double-dip recessioncontinue there, and more attractive than Europe, which istroubled by ongoing sovereign debt issues.

Private equity investment on the rise

Historically the engineering sector has seen a consistentlylow level of private equity involvement, however, so far in2010, 10% of deals in the sector have been completedby private equity buyers. This increase is attributed togreater trading visibility for funders and improving creditconditions in Japan. There is also a lack of viable exitoptions for private owners and therefore they areprepared to sell stakes to private equity firms,releasing some equity immediately.

One private equity firm of particular interest is Chinabased CITIC Capital Partners, who have been activelyinvesting in Japanese companies for a while. CITIC arefocused on mid-market investments in manufacturingcompanies which have strong brands and technology,and can benefit from greater access to the Chinesemarket. CITIC recently acquired a 67% stake in theJapanese container and packaging manufacturingcompany Tri-Wall K.K for an estimated $66m.

M&A activity

Deal Focus

JapanCapital City: Tokyo Population: 127,420,000

Area: 377,944 sq km Time zone: GMT +9

“A shrinking domesticmarket is forcingJapanese engineeringbusinesses to consolidate

their position at home whileseeking exposure to internationalgrowth markets”

TTeettssuuoo YYaammaazzaakkii,, IIBBSS SSeeccuurriittiieess

18

20406080

100120140160180

020406080100120140160180

02007 2008 2009 H1 2010

Tran

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volu

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Ave

rag

e d

eal v

alue

$m

Source: Capital IQ

201816

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100

200

300400

500

600700800

14

2005 2006 2007 2008

Dea

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($m

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201816

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100

200

300400

500

600700800

14

2005 2006 2007 2008

Dea

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($m

)

Total deal volume

Average deal value $m

19

Engineering has strong roots in Japan

Japan prides itself on being known as a “mono tsukuri” or“making things” culture and from a wider perspective, theengineering industry in Japan covers a broad range ofsectors including automotive, machinery and electronics.Surprisingly, engineered products in Japan account foronly 11% of the country’s GDP, contrasting starkly withservices which contribute to more than 75%.

Driven by the strong Yen and shrinking market due to the declining population, companies in the sector havecontinued to expand abroad. Domestically, lower tiercompanies have been consolidating in an attempt tocounter the effects of the low cost competition fromabroad, especially Asia.

Mid-sized Japanese engineering firms, particularly incertain niche sectors such as small electric motors, have been active in acquiring businesses globally. Such companies include Minebea and Nidec, whoseacquisitions include Sole Motors, an Italian manufacturerof motors for household appliances.

Key sectors are transforming

There has already been significant consolidation in the Japanese automotive parts industry over the pasttwenty years. The Renault-Nissan alliance, which wasestablished in 1999, started a review of automotive partscompanies with several major mergers forming the firsttier supplier companies of Calsonic-Kansei and Jatco.Much of the current M&A in this sector is among secondand third tier suppliers, who are hoping to gain newbusiness and cut costs.

Outside of Japan, the component manufacturers tend to follow the assemblers in setting up new overseasproduction facilities, either acquiring local part makers orin most cases making greenfield investments. Total salesof the 82 member firms in the Japan Auto Parts IndustriesAssociation declined 17% in 2008 with operating profitdeclining 92%.

The heavy machinery industry, which includes companiessuch as Mitsubishi Heavy Industry (MHI) and KawasakiHeavy Industries have diversified into new areas such as aerospace, renewable energy technologies andtransportation systems, while divesting non-corebusinesses. In 2008, MHI sold its paper manufacturing machinery business to Metso of Finland, and in 2007 sold its turbo molecular pump business to Shimadzu Corp for $26m.

Predictions

Globalization is still the key for large Japaneseengineering groups. Those with significant surpluscash can be expected to be more aggressive inoutbound M&A in 2011

Mid-sized Japanese companies will seek newgrowth markets, especially in Asia and emergingmarkets

Consolidation will continue in the Japanesedomestic market amongst the second and third tiersuppliers, for a long as the strong yen places themat a cost disadvantage compared to foreigncompetitors

Date Target Description Acquirer Deal Value(US$m)

May-10 Marktec Testing CCH5 47 Corp equipment

May-10 RK Japan Automotive parts Kilang 10(Malaysia)

Apr-10 Hoya-Hard Hard disk Western Digital 233 Disk Media manufacturing (USA)

Feb-10 EXCEL Inc Solar batteries Ishi Hyoki 19

Dec-10 Nikko Electric Automotive parts Ningbo 13Yunsheng (China)

Nov-09 Sony Mfg Measuring Mori Seiki 66Systems instruments

Nov-09 Panasonic Electric motors Minebea n/d

Oct-09 Sanyo Energy Batteries FDK Corp 70

Aug-09 Nippon Muki Filters and Daikin Industries 53equipment

Aug-09 EvatechCo LCD A-Power Energy 50manufacturing (China)

JapanRecent transactions

Some encouraging signs from the sector

There have been relatively few engineering transactions inSouth Africa in recent years if compared to other westerncountries with simular populations, such as the UK.Engineering firms have remained conservative in theirapproach toward M&A investment. The poor record ofeconomic stability over the last few years has not helpedand this has had a negative effect on concluding deals.

Improved liquidity and easier access to funding wassustained through H1 2010 and has led to a slight growthin M&A activity across all sectors if compared to H1 2009.Whilst the overall level is still low, we are seeing someencouraging signs for engineering in 2010, with a numberof smaller transactions having already been completed.Transactions have included Hudaco’s acquisition of Filter& Hose for $37m and Germany-based Becker MiningSystems acquisition of EMIS Sales, which are bothmining engineering deals.

Interest from overseas in SA

Since the start of 2007, more than a third of acquisitionshave involved foreign buyers. A significant proportion ofthese deals occurred in 2007, where almost two thirds ofthe companies were acquired by buyers from countriessuch as the US, UK and Germany.

This interest in South Africa is due to the opportunities forgrowth which it presents to those firms from developedcountries, which have already largely exhausted themarket in their home countries. Emerging markets on thewhole have seen higher levels of M&A in 2010, partly asthese countries have rebounded quicker post-recessionthan their developed market counterparts, giving rise togreater investor confidence.

Private equity participation low

Despite South Africa being home to a number of largeprivate equity firms, including Ethos Private Equity andPamodzi Investments, there have only been three privateequity transactions in the engineering sector over the lastthree years, all of which occurred in 2008. The largest ofthese deals was the $698m buyout of the major electricalengineering group Actom SA, by a consortium led by UKprivate equity firm Actis Capital. Although Actis are UKbased, they have been primarily focused on emergingmarket opportunities and have been investing in countriesincluding Brazil, Egypt, Malaysia and India.

‘Companies Act’ to facilitate M&A

The new South Africa Companies Act, which is due tocome into effect by the end of 2010, will alter the currentScheme of Arrangement clauses. These clauses are apopular method of implementing takeover transactionsthrough a court approval process, when 75% ofshareholder approval is reached.

Deal Focus

South AfricaCapital City: Pretoria (exec.) Population: 49,052,489

Area: 1,219,912 sq km Time zone: GMT +2

“Higher risk, capitalscarcity and investorcaution has led tosubdued M&A activity.

This scenario is forecast topersist through 2010 and post-recession trends suggest a shiftaway from an outward M&Afocus towards maintaining strong balance sheets”

Pieter Venter, Bridge Capital Advisors

20

123

654

789

0

20

40

80

120

100

140

0

60

2007 2008 2009 H1 2010

Tran

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$m

Source: Mergermarket

201816

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100

200

300400

500

600700800

14

2005 2006 2007 2008

Dea

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($m

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201816

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100

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300400

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600700800

14

2005 2006 2007 2008

Dea

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($m

)

Total deal volume

Average deal value $m

M&A activity

21

Under the new act, court approval will only be required inlimited instances thus simplifying the approval processand making takeover transactions much easier tocomplete where there are no objections. This changeshould promote increased deal flow in all sectors, despite increasing the personal liability of the directors.

Economic conditions remain subdued

A slow-down in engineering activity post-World Cup isexpected in H2 of 2010, although to some extent theeffects have been mitigated by the recent interest ratecuts (to a 30-year low) alongside improved consumerfundamentals. Additionally, easing inflationary pressureshave reduced debt servicing costs.

The general decline in economic activity shows signs ofhaving bottomed out now, although it is expected thatprivate sector investment will remained slightly depressedfor the next 12 months.

Government infrastructure spending is key

The resumption in government infrastructure spend willcontinue to remain a key factor for the South Africanengineering industry. Reduced industrial and miningactivity; limited private sector commercial investment;delays to the Eskom power program; delays anddisruption to the Gautrain Project; trading conditions in the steel reinforcing sector; as well as the ongoingstrength in the SA Rand and higher costs of financinghave all impacted on the industry and intensifiedcompetition.

Opportunities will in all likelihood emanate from publicinfrastructure contracts, private and renewable powerprojects and concessions as well as recovery intraditional mining, real estate and civil works markets.

Predictions

Based on historical trends, the engineering sector is likely to maintain relatively low levels of M&Aactivity given the limited number of players

M&A activity is however expected to gain sometraction in 2011, as companies which have built upstrong balance sheets and cash flows start to targetacquisitive growth companies in niche sectors

Growth in public sector infrastructure spending anda recovery in the traditional mining and real estatemarkets will help the engineering sector as a whole

Date Target Description Acquirer Deal Value(US$m)

Jun-10 Filter & Hose Mining machinery Hudaco 37

Apr-10 Braybar Pumps Pumps Kirloskar Brothers 2(Netherlands)

Mar-10 Wegezi Power Transformers and Invicta n/d switch gear

Mar-10 Cryoshield Cryogenic process PSV Holdings n/dequipment

Feb-10 Emis Sales Electrical mining Becker Mining n/d2002 equipment Systems (Germany)

Dec-09 Phoenix Power Wire and cable General Cable n/dCables manufacturer (US)

Aug-08 ACTOM Power generation Actis Capital (UK) 698parts and Old Mutual

Mar-08 Aard Mining Mining machinery Nedbank Capital / 16Equipment Matasis Investment

Jan-08 Astore Specialised pipe Hudaco 16fittings

Dec-07 CH Warman Slurry pumps The Weir Group 233Pump (UK)

Recent transactions