Investor Insights on Industrial Automation

Bundy Group is a boutique investment bank that specializes in the automation and industrial technology sectors. In addition to our mergers and acquisitions and capital raise advisory services, we also offer keynote presentations and webinars on a range of topics—the economy, labor markets and talent strategy to name a few—as well as compensation analysis and consulting services.

We’re excited to add Alex Chausovsky to our team. Alex has more than 20 years’ experience evaluating the automation and industrial technology sectors. I asked for his insights on topics he feels are important for industrial business owners and executives to be aware of as we head into 2024. 

Q: What are your thoughts on the growth and evolution of the automation and industrial technology markets over the past two decades?

A: One of the most significant evolutions has been the proliferation of connectivity, which comprises real-time device and process monitoring, advanced sensing and robust data reporting functions. Some call this Advanced Manufacturing, some Industry 4.0, while others refer to it as IIoT (Industrial Internet of Things). No matter what you call it, it’s been an absolute game-changer for the automation industry. The industry now has an immense treasure trove of data available at its fingertips. In the last couple of years, huge leaps forward in the generative AI space have only supercharged this trend, and the future is full of endless possibilities with new applications and use cases emerging daily.

Q: Are you bullish on the prospects for growth in automation and industrial technology?

A: In my opinion, the automation and industrial technology markets are poised for robust growth in the medium-to-long term future. How to deal with the ongoing lack of labor, particularly the skilled variety, is the most strategic decision facing business leaders. Which means it’s no longer a question about whether to automate or not, but how quickly and to what extent. In the near term, however, there are some headwinds for many companies in the automation sector. The substantial capital investment required for most automation and industrial technology projects is often financed by end users, and borrowing costs are much higher today. This is predominantly due to the aggressive interest rate hikes by the Fed over the last twelve months. Several machinery and heavy equipment markets are already in recession, and the downside pressure is likely to persist in 2024. When the next business cycle rising trend starts in earnest, which I expect will occur in 2025, then I believe automation OEMs will experience renewed growth. Bundy Group also has a pipeline of automation solutions providers, including system integrators, who are seeing no sign of a slowdown and have healthy backlogs. 

Q: There is a lot of capital in the market seeking growth through acquisitions, especially in automation.  However, the rapid increase in the cost of capital due to rising interest rates can negatively impact business valuations. In assessing these two competing trends, give us your takeaways for privately held companies.

A: There is a clear and proven correlation between the ups and downs of the business cycle and company valuations in the industrial manufacturing sector. With the industrial economy firmly on the back side of the cycle (deceleration), and likely headed for a mild recession in 2024, it’s not surprising that business valuations in a number of segments are also down. The falling multiples in certain segments are being pressured by several factors; it’s not just the fact that the cost of capital is way up, it’s also a reflection of greater pessimism when it comes to the economic and profit outlook for businesses. Having said that, quality companies can sell above market valuations if they are positioned the right way in a competitive sale process. Furthermore, better prepared organizations that have stable revenue, are profitable and growing, and have scale, will stand a better chance of selling at a premium multiple no matter what the economic outlook is. Potential sellers also need to recognize that it takes time to adequately prepare their business for a sale or capital raise, so the sooner they start to work on getting their ducks in a row, the better off they will be when it’s time to go to the market for a competitive bidding process. 

Q: Can you please provide some context on the lack of quality talent available to industry?

A: Despite the macroeconomic headwinds, access to sufficient skilled talent remains a major obstacle for many organizations today. In fact, it‘s highly likely that the mild recession expected in 2024 will, for the first time in history, occur without corresponding large-scale layoffs. Companies are doing everything they can to hold on to their employees, including being willing to accept lower profits, as the difficulty and cost of finding and onboarding workers is not something they want to repeat during the next business cycle rising trend. This means we remain firmly in a candidate-driven labor market. The latest jobs data supports this assertion. In the fourth quarter of 2023, there are more than 9.5 million job openings in the US, and only about 6 million people actively looking for work. This means a 3.5-million-person labor gap exists. We simply don’t have enough workers for all the open positions. In manufacturing specifically, there are currently over 600 thousand job openings. The competition for labor isn’t limited to a particular industry, it’s widespread among many vertical markets and geographies. So, while retention rates are stabilizing relative to the high-turnover period witnessed in 2021 and 2022, I am not seeing the pendulum swing back to the employer in a meaningful way.   

Bundy Group is a boutique investment bank that specializes in representing automation, industrial technology and cybersecurity organizations in business sales, capital raises and acquisitions.  Over the past 33 years, Bundy Group has advised and closed on over 250 transactions. You can learn more at www.bundygroup.com or by contacting Clint Bundy at [email protected]. Bundy Group Securities, LLC, is a registered broker-dealer and member of FINRA and SIPC. This content is for informational purposes only and is not intended as investment advice or a recommendation to buy or sell any security.