COREBarclaysCapitalInc.and/oroneofitsaffiliatesdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.PLEASESEEANALYSTCERTIFICATION(S)ANDIMPORTANTDISCLOSURESBEGINNINGONPAGE17.EquityResearch8March2019Restricted-InternalU.S.Multi-IndustryPortfolioChange–M&Asteppingup;ChurningisnotapanaceaPortfoliochangeandcapitaldeploymentaretwodifferentiatingfactorsfortheMulti-Industrysector,giventhebreadthofbusinessesthatmanyMImanagementteamspresideover,thesuccessofthe‘compounder’businessmodelovertime,andthewidechoiceoftargetindustriesandassetsforentry/exit.Severalportfoliochangeshavebeenannouncedinrecentmonths,whichhavegeneratedconsiderabledebatewithinvestors.Whatwefindmostinterestinginthecontextofthesediscussions:M&Amaystepup:InourlastPortfolioreport(‘PortfolioChange–Divergentapproaches;July16,2018’)wenotedthat‘compounders’(whohavetypicallyprovedthemostadeptatportfoliomanagement/capitaldeployment)weredivestingassets.Theirbalancedapproachhascontinued,withastep-upinM&A,someequityissuanceandfurtherdivestments.Wethinkthecompounders’movesmaypresagemoreM&AinbroaderMI,givenlowerorganicgrowth,lowerleverageformanycompanies,andlowinterestrates(seeour‘ISCtakeaways;February25,2019’).MostMIstocks,though,havenotperformedparticularlywellfollowinglargeM&A(excludingthecompounders).Highrecurringsales,butnotnecessarilySoftware,M&Atargets:Therangeofassetsbeingacquiredisstriking(HealthcareIT,carwashequipment,PLCs,electricalswitchgear,pumps,LifeSciences,andorthopedicdevices),underscoringthecontinued‘Multi-Industry’aspectofthesector.Despitealltherhetoricon‘Digital’,fewcompaniesexceptROPandFTVarerushingtoundertakesoftwareM&A.MostcurrentM&Adealsdoreflect,though,anefforttorenderone’sportfoliolesscyclicalandmore‘recurring’,possiblyreflectingthatwearelateintheMacroupturn.Fairlydisciplin...
