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M&A trends in ER&D for 2022: Strategic Dominance and the Era of Consolidation - Blog 3
M&A trends in ER&D for 2022: Strategic Dominance and the Era of Consolidation - Blog 3

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Introduction

The Engineering Research and Development (ER&D) segment displayed notable trends in 2022. Deal volume was at 2.2x of 2020 levels. Strategic buyers have dominated total deal volume, with 75% share in the last 3 years. The number of unique buyers in this segment increased from 14 in 2020 to 25 in 2022. PE participation remained steady over three years, with a focus on PE roll-ups, which involved merging multiple smaller companies into a larger entity to enjoy economies of scale. Industry consolidation and the convergence of ER&D and IT services were key drivers of mergers and acquisitions. ER&D players sought to enhance consulting, design, and digital capabilities through acquisitions.

In terms of geography, Europe-based companies attracted significant interest from global acquirers, with deal volumes increasing by 100% from 2020. Germany remained a favoured destination, followed by Sweden, France, and Finland. North America also gained prominence due to manufacturers relocating back to the US and Canada amid global supply chain disruptions.

Themes in the ER&D M&As

  • Smart Manufacturing & Industry 4.0 - Supply chain disruptions in the last couple of years accelerated digitization of factory floor for enhanced tracking, monitoring, performance, and maintenance optimization. ER&D players were responsible for 44% of acquisitions in the Smart Manufacturing & Industry 4.0 sector.
  • Semiconductor & Embedded Systems - Rapid digitalization through intelligent and connected devices across verticals and need for small-sized low power silicon chips is fuelling demand for semiconductor design and embedded systems capabilities. In this sub-segment, ER&D players accounted for nearly 35% of all acquisitions.
  • Product Engineering - Demand for Computer Aided Engineering (CAE) capabilities in simulation and analysis grew multi-fold, with the transition from physical prototype in product development to digital twins, entailing lower cost of product R&D and faster feedback loops. A substantial 81% of acquisitions in Product Engineering were initiated by ER&D players.
  • Automotive - The automotive industry is transitioning towards software-defined vehicles, with trends in Connected Vehicle Technology, Autonomous Driving, Shared Mobility, and Electrification driving change. Moreover, ER&D players dominated Automotive acquisitions, making up 77% of the total.

 

M&A1

1Transactions considered for the period 2020, 2021 and 2022. Analysis buyer activity by category (ER&D, IT Diversified IT and PE) into different subsegments.

 

Conclusion

ER&D services emerged as added growth engines for IT services players; the acquisition route enabled scaling high barriers to entry built upon deeply entrenched client relationships and multi-decade deals in ER&D. The market is attractive for PE investors due to (a) secular growth in R&D spends (b) underpenetrated outsourcing (c) highly fragmented market (d) long term multi year customer contracts and (e) significant interest from large strategic buyers ensuring exit.

 

Source: https://nasscom.in/knowledge-center/publications/year-paradoxes-ma-trends-and-outlook-technology-services-sector

 


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