One third of Europe’s independent engineering companies could be swallowed up by a wave of consolidation, according to a report from UBS Global Research.
UBS argues that larger groups are seeking growth by acquisition to achieve ‘greater effectiveness – larger market shares, strengthened franchises – rather than greater efficiency’.
The logic behind this is partly that bigger conglomerates extract better margins, claims UBS. ‘A company has to be at least two or three times the size of its nearest competitor to enjoy any real degree of pricing power. Too few European companies are in this situation.’
UBS says that merger and acquisition opportunities exist because engineering is heavily fragmented. Even more horizontally-integrated firms tend to work in two or three rather than all six of the industry’s main sub-sectors (automotive, chemical, materials handling, environmental, power, and paper and packaging).
The bank also argues that European economic and monetary union will encourage consolidation.
Engineering companies tend to be strong in one country, with ‘lesser positions’ elsewhere. As borders fall, they will ‘find that the best defence is offence – unless they are looking to take market share abroad, they will be at the mercy of foreign companies.’