Key Trends Driving Manufacturing M&A
Manufacturing businesses have seen the industry contract to its lowest level in more than 10 years. The Institute for Supply Management’s manufacturing index fell to 47.2 in December 2019—almost as low as it was at the end of the Great Recession. A tight labor market, retaliatory Chinese tariffs, and automation all figure prominently in this downturn. Here are five trends we are seeing in manufacturing M&A in 2020.
The Rise of the Robots
A tight labor market is holding back manufacturing companies, but has spurred deal-making in robotics. Robots can help streamline processes, take over dangers roles, and save money. PE firms see the labor shortage as an incentive to purchase companies that can aid production. For example, Ames Drywall Finishing Tools presented Sub Capital with a powerful opportunity to purchase its automatic drywall finishing tools. Industry analysts suggest the tools can reduce costs by 60 percent.
Larger entities hope to shed assets that are not integral to the business core. PE is grabbing these castoffs. KPS acquired Howden in 2019 for $1.8 billion. This sale allowed the prior holder to pay down debt, as KPS grew the business into a revenue generator.
A 2018 Ernst & Young Study emphasizes that almost nine in ten companies plan to divest of assets in the next two years—more than double the figure from just a year earlier. Global tax shifts, new tech, and emerging trends highlight the need to sell non-core assets. Seventy-four percent of executives say that the evolving technological world directly influences divestment plans.
Tunnels and Bridges
Infrastructure investments are inevitable and highly necessary. Many PE firms are raising capital so that they can capitalize on a boom in infrastructure. The United States needs significant infrastructure investments, despite ongoing political squabbles. By building capacity now, companies can better position themselves to take advantage of the inevitable boom. The latest $1.4 trillion federal spending bill will set aside money for infrastructure repair. Those funds will likely grow with time, and investors want to ensure they are ready.
Is Bigger Better?
In the manufacturing sector, the answer is a resounding yes. Retaining customers and growing the base is difficult. Manufacturers find that they can do so by moving into related businesses, becoming larger and more competitive. Size is the driving force behind manufacturing M&A. Companies want to be bigger.
The biggest challenge most manufacturing companies face is attracting customers, and then retaining them. M&A blends and expands groups of customers, making better use of investments and expenses. One Equity demonstrated that in 2017, when it invested in Anvil International. Five acquisitions later, after just two years, it sold Anvil to Smith-Cooper International, which capitalized on Anvil’s big footprint to offer more services. One Equity almost doubled the organization’s EBITDA.
Real-time data is increasingly popular across industries. It opens new opportunities, and offers significant value to customers. Manufacturers can anticipate when a part needs to be replaced, and plan accordingly, producing less downtime and frustration. Past production data is misleading, creating gaps in coverage and service, as well as quality control issues. With better data, manufacturing firms can offer faster service, improving the customer experience.
About NuVescor Mergers & Acquisitions
At NuVescor, we align the interests of investors and business owners to enable the personal and financial goals of our clients. For over a decade, we have helped founders and owners of companies in the manufacturing sectors achieve maximum value for their companies. Together, we can provide business valuations, financial analysis, investment guidance, and business transaction advice for middle-market companies with revenues from $5 million to $500 million.