12/4/2024 Industrial Thought Leadership

Baird’s 2024 Distribution Update and 2025 Industry Outlook

Baird’s Global Distribution Group would like to thank our clients for their continued support and partnership. Despite uncertainty in some parts of the market in 2024, Baird continued to deliver exceptional outcomes for distribution clients across a range of business models, end markets and geographies. Since 2019, Baird’s Global Distribution Group has advised on 45+ successful M&A transactions amounting to $45+ billion in total transaction volume. We expect momentum to continue with a record backlog and an active pipeline of high-quality transactions.

While deal volumes are off peak 2021-2022 levels, interest in distribution assets remains strong. As 2025 gets underway, we are keeping a close eye on a handful of themes that will influence distribution M&A.

Baird's Distribution Sector Review report cover.

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What We’re Watching As 2025 Gets Underway

Managing Potential Tariffs

Many industrial supplies are sourced from China (fasteners predominantly so), and we would expect distributors to adjust sales prices, passing on any increases to customers to maintain gross margin percentage. While we view incremental inflation ultimately as a net positive for distributors, repricing timing lags and demand erosion could represent near-term challenges. Tariffs could also impact how quickly rates moderate into the back half of 2025.

Recovering Industrial Demand

De-stocking has mostly worked its way through the channel yet distributor performance has lagged the prolific growth seen in 2021-early 2023. Weaker industrial production activity remains the major obstacle for distributors, as PMI has been in contraction since October 2022. Industrial pent-up demand, expectations of further rate cuts and post-election stability are fueling confidence that the industrial environment will improve throughout 2025.

Continued North American Nearshoring and Reshoring

In response to prolonged supply chain disruptions and increasing global tensions, manufacturers are prioritizing investments in domestic capabilities to reduce supply chain risks. Domestic manufacturing construction spending has surged more than 200% compared to pre-COVID levels, and since 2020, the U.S. has added back over 1 million jobs. The shift toward nearshoring and reshoring is expected to create substantial incremental demand over the mid-to longer-term for distributors across various subsectors, driven by the economic flywheel effect generated by the expansion of manufacturing operations throughout the country.

Numerous Factors Suggest an Uptick in M&A Activity Throughout 2025

Due to their powerful combination of large and diverse markets, secular tailwinds, attractive niches and clear equity story, a range of subsectors within distribution will continue to attract investor interest throughout 2025. Further, several technical factors combine to suggest a strong outlook in M&A for distributors throughout 2025. First, sponsor DPI is holding at 14-year lows, indicating private equity firms should be more motivated to seek exits. Additionally, the current constructive and available debt markets provide favorable conditions for exits. Finally, the number of private equity-owned portfolio companies in the U.S. continues to rise, now surpassing 11,500, creating a larger pool of potential targets.