Measured Success

May 26, 2008

When people say that “out of tragedy something good always comes,” you just know they’re thinking about the Test & Measurement industry.

Well, maybe not always but most of the time, right? Okay, never, but that doesn’t mean there aren’t great opportunities in the sector for middle-market M&A pros.

In this case, the “tragedy” is the sorry state of the M&A market — yes, even in the heretofore untouchable middle market — and the “good” is the opportunities that may arise out of the ashes. It seems to me that as times get tougher, we all not only get more creative but also tend to expand our horizons. Enter the T&M market.

True, it’s not likely the first sector that rolls off the tongue for most dealmakers, of any size, but it might be worth a gander if you’re on the prowl for high-margin businesses. (And who can say no to that, especially now?) Baird just came out with some thoughts on the industry which makes for a fairly compelling story. First, though, it would probably help if you knew what these companies actually do.

Basically, they make instruments that test and measure temperature, electrical signals, biological interactions and security threats. Baird breaks the players down into four categories: industrial, life sciences, communications & electronics, and safety & defense.

So, what’s the story? Well, the one that jumped out at me was gross margins better than 50% and Ebitda margins in excess of 20%. That might be a big reason this sector is seeing some M&A action. Indeed, while most of the deals in this space are of the small, private-company variety, there have recently been some larger transactions that have drawn at least a bit of attention, including Danaher’s buy of Tektronix for $2.8 billion and Teradyne’s buy of Nextest ($325 million).

Valuations for the group have come down in the past six months, but Baird says that’s more likely the result of trends in the broader stock market, noting that many of the T&M companies are growing at above-GDP rates. What’s more, lots of these companies are serving end markets that are currently in their sweet spots, such as infrastructure (which is all the rage now), oil & gas (you know about that), and environmental services (see infrastructure).

There’s no denying that many of the players in this space fall into the “niche” category. But given the often mission-critical nature of their business, and the efficiencies that their products offer at a time when businesses are scrutinizing every dime they spend, it’s a market that may offer some opportunity. Can’t hurt to look.