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2012 Photonics Industry M&A Activity

Small and Middle Market Consolidation

Unlike the M&A market as a whole, activity in the photonics industry continues with the volume of transactions in 2012 surpassing that of 2011.

The trend of small and middle market consolidation in the highly fragmented photonics industry, as well as in the vertical market segments it enables, persists. Given uncertainly around the future role of government regulation and public policy, it is likely that organic growth will remain muted and strategic buyers will continue to absorb targets - sustaining a pattern of consolidation through 2013.

Activity

M&A transactions for target companies are researched with closing or announce dates from January 1 through December 31, 2012.  Values are in $US at historical rates of exchange.  Follow this link to transaction detail.  <2012 Jan to Dec Photonics M&A Transaction Detail>

Transaction Volume

The Advanced Manufacturing sector that includes material processing, metrology, robotics, and semiconductor equipment saw the most activity in number of transactions.  More than half of the transactions in this segment are metrology instrumentation companies addressing a breadth of applications from X-Rite's long established colorimetry solutions and standards to Aldebaran's forward looking robots, products of the convergence of visual, voice and mechanical technologies.

The Energy segment that includes the Solar value chain - wafers, cells, panels, systems - also experiences a high volume of transactions. However, unlike the Advanced Manufacturing sector, the Solar sector realizes low valuations. This is consistent and evidence of an overcapacity industry where the living dead are consolidating rapidly.

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Transaction Value

The total reported transaction value by segment is heavily weighted by a small number of large market transactions in each segment. In Biophotonics, specifically Medical Diagnostics - Dako, supplier of pathology instrumentations and reagents, and Gen-Probe, supplier of molecular diagnsotic assays are acquired by Agilent and Hologic for $3.0 and $4.2billion respectively. In Photonics, Molycorp acquires Neo Material Technologies including its rare earth engineered materials for $1.6billion. In Information Technology, Ericson acquires Telcordia, leading optical networking player whiles Samsung acquires S-LCD, large volume LCD panel manufacturer for more than $1billion each.  In Advanced Manufacturing, ASML's pending acquisition of Cymer for $2.7billion accounts for more than half of the segment's transaction volume.

Lighting, Energy, and Defense, Security & Sensing segments see less than half the volume of transactions - as well as no large market transactions. 

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Small and Middle Market Transactions

Half of researched transactions disclose the transaction value. Of those disclosed, the split is approximately 1/3 each - small market (<$5M), micro middle market ($5 to $25M), and small/middle market ($25 to $500M).

Since 2010, the lower and middle of the M&A middle market remains robust unlike the downward trend above $500M.  These researched transactions are consistent with that market as a whole.  However, uniquely, in the Photonics sector and the vertical market segments enabled by photonics, strategic buyers are acquiring orders of magnitude smaller businesses that are delivering highly differentiated products and enjoying very high barriers to competition via intellectual property.

Strategic vs. Private Equity on Buy and Sell Side

Like 2011, the vast majority of transactions by volume and value are strategic. However, private investment firms are less active in 2012 than 2011 - down to 3% from 10% of transactions involving private investment buyers and down to 12% from 22% involving private investment sellers. This is evidence that strategic premiums in valuation are higher in 2012.

Valuations

In 2012, the total and average Enterprise Value of the 326 transactions reporting financials data are $30.6 billion and $131 million respectively. While the total number of transactions and volume more than doubled from 2011, the average Enterprise Value is almost half. This is more evidence of an increasingly robust market for smaller transactions.

The simple average of reported Implied Enterprise Value to EBIT, EBITDA and Revenue multiples are healthy at 19.5, 21.1 and 1.9 respectively. Implied Enterprise Value includes implied equity value, earn-out and contingent payments, rights, warrants, options, and net assumed liabilities adjusted for size. Multiples are slightly less than for those of 2011 researched transactions.

Comparing sectors, Biophotonics realizes the highest average multiple of Enterprise Value to Revenue, 7.1, while Energy/Solar realizes the lowest, 0.7.  Very few transactions report financials and the average Biophotonics sector multiples are skewed high by a single transaction in the Diagnostics segment. However, when removing this transaction from the average, the average Enterprise Value to Revenue remains the highest at 4.0.  The Authentication & Identification segment of the Defense, Security & Sensing sector and the Medical Devices segment of the Biophotonics sector also realize high valuation multiples Enterprise Value to Revenues of more than 3.0.

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Geography

Asia, Europe, and United States/Canada, as geographical regions, see similar volumes of transactions and total value. Europe, however, sees more sell side than buy side transactions.  This may be indicative of opportunistic foreign buyers acquiring distressed properties oversees.

Most Active Buyers

Highlighted below are the most active buyers by volume and size.  More than 20 strategic micro and middle market buyers acquired two or more entities in 2012 - indicative of highly strategic and not opportunistic buys.

The Transactions

Follow this link to transaction detail.  <2012 Jan to Dec Photonics M&A Transaction Detail>