Manufacturing M&A: Lessons for 2021 and Beyond

Manufacturing M&A: Lessons for 2021 and Beyond

Relaxed credit, cash-rich balance sheets, and an improving post-pandemic economy are igniting a fire of M&A in the manufacturing sector. This is good news, since successful mergers are critical to the global economy and the bottom line of individual companies. But history has taught an important lesson: bad mergers erode value, and may actually undermine long-term success. It can be difficult to get mergers to realize the promised synergies, and integration is notoriously difficult.

While key players in deals often dismiss failed deals as outside of their control—due to chance, fate, or just plain bad luck—the reality is that the factors most likely to destroy a deal are likely well within your control.

Valuation Matters

Overvaluation is the enemy of success. Do not place unflinching trust in the valuations offered by external advisors such as investment banks. Success fees, rather than a desire to see the deal succeed, often drive these excessive valuations. You need a keen understanding of the metrics used to value your company. Don’t let your emotional reaction to a high valuation color your ability to think critically.

Get Specific About Synergies and Their Execution

Transformational deals are often little more than a CEO’s itch to do something, anything. Don’t assume a big deal is going to change everything just because you want it to. For a deal to truly offer synergistic value, you must be able to identify the specific synergies you hope to achieve. And then—this is the difficult part—devise a plan for making these synergies a reality. Integration planning must be a part of the dealmaking process—not an afterthought that only begins when the deal closes.

Open Communication

Mergers can be a time of immense anxiety for your staff, your customers, and stakeholders in the community. Lack of communication makes this anxiety worse, and gives the rumor mill time to fill in the gaps—usually with negative information that undermines the merger. As you move into the deal, develop a communication plan that offers a clear, consistent message and allays any fears. Identify a single point person for questions about the deal, and empower this person to speak empathetically and with specifics.

Knowing What You Don’t Know

Decisions about M&A are among the most important you will ever make. Unfortunately, these are also the decisions that most corporate leaders have very little experience handling. Your board, too, has probably only worked on one or two deals. This is dangerous because it’s easy to overestimate your knowledge and make risky decisions without even realizing you’re doing so. The right deal team can help fill in knowledge gaps, alert you to pivotal moments in the decision-making process, and ensure you end up with a deal you’re happy with. Don’t go it alone. DIY deals are often more costly, and are always more likely to fail.

How to Make M&A Part of Your Manufacturing Growth Strategy

How to Make M&A Part of Your Manufacturing Growth Strategy

Mergers and acquisitions are an excellent strategy for companies seeking to penetrate new markets, become more competitive, or instantly access new technologies. Particularly in manufacturing, M&A offers significant value, and the post-COVID M&A bonanza is currently booming. But not all M&A deliver the promised return on the investment. Indeed, M&A can be a significant waste of money if you’re not strategic about your goals. M&A only works as a growth strategy if you choose deal partners who are well-positioned to support meaningful growth. Here are five scenarios in which that can happen.

Rapidly acquiring talent and IP

Some sectors in manufacturing are suffering from an acute shortage of labor. Factor in the value of quality intellectual property, and you can see how a merger could quickly accelerate growth in your company. The acquisition of a well-trained team is incredibly valuable—especially if they bring with them valuable IP and the knowledge of how to use it.

M&A fills gaps in client lists or services

Sudden changes in the marketplace—witness COVID-19—can create sudden gaps in a firm’s services and client base. These gaps leave space for a valuable merger. Consider, for example, how post-9/11 regulations required the defense industry to adapt with new skills. Emerging technologies also inspired a manufacturing boom, for companies that were prepared. Companies that had the right experience and clients became infinitely more valuable, even as everyone else floundered.

Building new synergies

Synergies for both companies can offer value to each, if you think carefully about M&A as a growth strategy. There are two approaches here: revenues and costs. Cost synergies help reduce expenses by capitalizing on and consolidating resources. Revenue synergies shift the competitive balance of power by changing market dynamics, raising prices, or selling new products. If a merger offers the opportunity to penetrate new markets, close some plants, reduce competition, or expand your customer base, it may have synergistic value.

Make better use of time

Time is a finite resource, and arguably the most valuable resource we have; you can’t earn more of it. The right merger can help you save significant time. Consider a firm that’s weighing adding a new service or product to its offerings. Adding this organically can take months or even years. It demands significant resources, possibly bureaucratic red tape, and a lot of ingenuity. But adding someone else’s successful products and services to your existing approach requires only that you go through the process of M&A. Your investment comes pre-tested, allowing you to continue growing your core business.

Adding a new business model

Manufacturing companies run the gamut in terms of business model. If you can add a new, proven revenue-generating model to your existing approach, that offers additional security and revenue. It’s a lot easier to incorporate someone else’s tried and true method than it is to develop your own, and this is where mergers offer exceptional value.

Manufacturing M&A in 2021 and Beyond: Predictions and Insights

Manufacturing M&A in 2021 and Beyond: Predictions and Insights

The COVID-19 recovery is already in full swing. And while many manufacturing businesses struggled to stay afloat in the wake of the crisis, many also seized the opportunity. Deal cycles are faster, with many companies purchasing low performers as an affordable growth vehicle. So what do we anticipate seeing in the next 2 or so years? Here’s what manufacturing M&A trends are already revealing.

The Aftermath of COVID-19

While all sectors saw some disruption thanks to the pandemic, manufacturing suffered immensely, with a 63% decline in deal value and a 36% drop in deal volume between Q1 and Q2 of 2020. Transformational deals became less prevalent, with a greater focus on small deals. Special purpose acquisition companies (SPAC) also became bigger players, leading to an influx of PE investment in technology and digital portfolio companies that support manufacturers.

We’ll likely continue to see pandemic-related disruptions. This means a greater focus on regional businesses to help cultivate partnerships and drive revenues. As growth becomes the focus, technology will become more important yet again.

Another interesting trend is that, though the pandemic itself slowed deals, the craving for speed has increased. We witnessed a decline in speed to close from 130 to 60 days during the 2008 Great Recession. A similar trend may persist into the future.

The Deals That Will Dominate the Next Two Years

Greater access to capital and ongoing interest in innovation will drive the initial rebound. Manufacturers will then focus on optimizing operations. Some sectors are well positioned, especially in the middle market. Manufacturing companies will be eager to divest of non-core and low-performing aspects of their business, then use that money to invest in something more valuable—especially digital technologies.

What Companies Need to Do to Succeed in the Post-COVID World

The tactics necessary to survive in the post-COVID world aren’t that different from those that successful companies embraced prior to the pandemic:

  • Plan early so that you have time to get your business in order.
  • Bring in the right advisors to prepare you for the deal and to help manage integration.
  • Be mindful of digital opportunities during a sale.
  • Know the workforce implications of a sale, and work hard to keep your key team members on board and happy.
  • Focus on the needs of the business when building the integration model. You need a clear plan, with identifiable goals and success benchmarks.
  • Build a flexible architecture for data and operations. This can help you build a standardized integration model that saves time.
  • Plan for integration well before closing, and devise a communications plan that gets ahead of the rumor mill and clearly and succinctly explains the merger to key stakeholders.
  • Get a spectacular management team in place now, then do whatever is necessary to keep them on board.
Post-Merger Integration Strategies for Your Manufacturing Business

Post-Merger Integration Strategies for Your Manufacturing Business

Manufacturing companies are increasingly leading with their integration strategy as they begin the M&A process. The reason for this is simple, and important: integration failures are common, and if you wait until the merger to plan for integration, integration very well may fail. While there are many different ways to integrate, building a holding company and fully integrating an acquisition are the two different extremes. Let’s explore each.

Building a Holding Company

The holding company model relies on using management to improve companies that already have good brands or products. The goal is not to gain value via cost synergies or revenues. Instead, the acquired business continues to operate autonomously. Holding companies can help parent businesses hedge against market conditions over time.

Full Integration

With a full integration, one company gradually sheds its identity as the companies merge into a single entity. This can save money on software and hardware, while streamlining business activities. While every acquisition should be focused on the deal thesis, the most successful deals are closely fixated on the factors that improve deal success, including:

  • Management: An exceptional management team can ensure you hit key benchmarks, while adding value to the deal. Just make sure you have managers from both sides of the deal who are prepared to embrace the new culture of the shared entity.
  • Financial: Set clear benchmarks for growth, margins, working capital, and ROI.
  • People: People make your business. So treat your key people well, and incentivize them to remain on after the deal closes.
  • Revenue growth: You must identify your plan for increasing market share and pricing power, pushing products through existing and new distribution channels, and investing in innovation.
  • Renegotiation: You may need to renegotiate terms with customers and suppliers to improve your cash conversion cycle.

These two distinct integration strategies can each generate immense value. But it’s important to clearly identify goals at the outset of the deal, so you can assess which strategy is likely to work best and devise a plan for pushing forward with that strategy.

5 Tips to Help the Acquirer of Your Manufacturing Business Succeed

5 Tips to Help the Acquirer of Your Manufacturing Business Succeed

Most manufacturing company sales involve a portion of the sale coming in the form of a seller’s note. This gives the buyer reassurance that the seller is truly invested in the success of the company, and will be available for support after closing. The move toward closing can prove very stressful for a buyer, as the reality of running a new business draws near. Sellers play a critical role in the process. Here are five things you can do to help the buyer succeed:

Hand Over the Right Information

As you approach closing, give the buyer a lis tof alls ervice providers. These are the people who truly understand your business, and they may offer the buyer better terms for the many issues they have to tackle: business insurance, payroll, banking, employee benefits, 401Ks, and more.

Introduce the Staff

Your team trusts you. They’re also the secreit ingredient in the recipe for running your business. If you introduce oyur team to the buyer, they’re more likely to believe in the buyer and the sale. Work out a communication plan that reassures your staff, ensures a positive first introduction, and helps your staff and the buyer to steadily get to know one another.

Take Ego Out of It

You’ve grown and managed your business for years, so it’s easy to feel like you’re giving up your child. You may believe no one else can run your company quite as well as you can. You may be right. Nevertheless, you must resist the urge to correct everything the buyer does or become resentful. Suppor the buyer, always speaking positively about them to your staff. Encourage stakeholders to direct their questions to the new owners.

Remove your ego from the transition process:

Many business owners believe that no one could do their job as good as they can. This is true especially of retiring founders. You’ll be tempted to say to a staff member, “Well, that’s not the way I would do this task.” For a successful transition, your ego must be removed from the situation. The buyer may have different ways of doing things. Your ego has no place in a sale.

Introduce the Customers

If your customers are loyal to you and not the business, the buyer’s investment could be in danger—along with your seller’s note. Gradually educate customers about the sale, and be sure to communicate openly. Let them know what’s in it for them. Then use your capital with customers to get them to trust the new buyer, by assuring them that you believe in the sale and believe the change will steadily produce better results for your customers.

It may be challenging to leave your ego out of this. After all, everyone loves to be loved, and you probably relish the chance to be the beloved founder of a beloved company. Spread that love around, and keep your eye on the big picture: the long-term survivla of the business you have built.

Share Cultural Knowledge, Too

Each business has its own unique culture. These soft elements of a company can be hard to quantify or describe, but can also make or break the company. Talk openly with the buyer about your company culture—what makes it different, what’s important to stakeholders, why you believe your company has thrived. Then support the buyer to support that culture, while making steady improvements.