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.
U.S. manufacturing has dipped to its lowest level in more than 10 years. Yet the M&A market remains active, with promising signs for future improvements. Interest rates are historically low, and investors are flush with cash. Savvy investors are investing now in this growing sector, and reaping the rewards of doing so. Whether you’re a buyer, a seller, or an interested observer, understanding the most important trends in this industry can help you grasp the rapid changes it is currently undergoing.
Robots Everywhere
Low unemployment means a tight labor market, and manufacturers are relying on robots to keep up with demand. Where skilled manufacturing jobs are abundant, businesses continue to struggle to find the right employees. Raising starting pay can only go so far. To manage this shortage, companies are relying on robots who can work longer and harder, and who are not susceptible to the same injuries and other risks humans are.
Productivity Growth
Automation, like the robot trend, is driving increases in productivity that may render some jobs obsolete. PE firms are increasingly investing in companies that can boost productivity and help portfolio companies to become more efficient.
Cost Cutting Measures
While many companies are investing in expensive new technologies to reduce costs over time, the overall trend is toward reducing costs. Labor costs have risen 15 to 20 percent, making new technology seem more appealing—and more affordable. Larger companies are increasingly prioritizing their core competencies, and looking to get rid of secondary assets.
Bigger and Bigger
Manufacturing is a challenge industry. Retaining customers and recruiting new ones can be exhausting. Consequently,many companies are growing their product offerings by merging with companies that offer valuable synergies. Mergers and acquisitions offer a faster path to attracting new customers and better capitalizing on investments.
A Focus on Infrastructure
Knowledge about our nation’s crumbling infrastructure is now widespread—and a widespread source of concern. Companies that focus on basic infrastructure, like bridges and tunnels, stand to gain big. We may also see robots and other forms of automation figuring prominently in the push to rebuild national infrastructure.
Real-Time Data
Real-time data is increasingly important across industries. It opens new opportunities, and can help you better identify and meet your customers’ needs. Equipment manufacturers can use this data to offer important insights into equipment performance and maintenance needs, offering better service and a longer product life.
Smart Warehouses
Honeywell’s acquisition of Harsum in 2019 gave them access to warehouse automation to the tune of $493 million. Businesses increasingly understand that smart warehouses can save significant cash, reduce risk to staff, and help them deliver ahead of schedule. PE firms are increasingly interested in investing in these warehouses, and in supporting their acquisitions.
Subscription-Based Sales
A subscriber is a long-time customer. To whatever extent a business is able to sign up customers for recurring fees—maintenance service, routine deliveries, or other recurring services—it can increase its bottom line, reduce risk, and better weather unexpected financial crises.
5 Factors Affecting the
Manufacturing M&A Landscape
The manufacturing industry includes a broad range of subsectors, including aerospace, food, automotive, heavy equipment, and more. Banks have traditionally extended significant credit to the manufacturing sector because they have tangible assets that provide significant collateral. This mitigates the worst-case scenario, giving the bank a valuable asset to seize.
But traditional risk management approaches often fail to look at the intangible value in asset-heavy companies. Unlocking these hidden value drivers is critical to the success of M&A.
Prior to the COVID-19 pandemic, North American manufacturers were part of an M&A bonanza. The pandemic has brought that to a screeching halt, thanks to uncertainty about the future of the pandemic and the political landscape.
Many would-be sellers have seen declines in value, inspiring them to postpone the sale in the hopes that market conditions might improve. Those with the most profitable operations and strongest balance sheets have enjoyed larger market shares as less successful industry peers struggle to adapt.
This phenomenon happens with just about every economic downturn. It’s a predictable cycle. And while we don’t know when it will end, we do know it will end.
If your company is considering M&A—either now or in the future—you should know that buyers are showing signs of re-emerging confidence. M&A was already improving in the second half of 2020, and we anticipate that trend will continue. But several factors continue to weigh on the industry. They include:
Buyers continue to exploit the situation, seeking the lowest possible sale prices by going for distressed companies for sale at bargain basement prices.
Deals that were once delayed by COVID are now moving toward closing.
Companies are pursuing inorganic growth as a way to thrive in a low-organic growth environment.
Business owners are facing mounting fatigue as they deal with the challenges of COVID.
Sellers who left the market are now seeking to re-engage with buyers.
A backlog of postponed transactions may help fuel activity through the first half of 2021.
Deal pipelines are again growing.
Manufacturing businesses must understand the role the pandemic may play in their bottom line, as well as how the new M&A bonanza may serve as a tool for growth. As always, expert insight from an M&A advisor can help you better position your company for whatever comes next. Don’t lose money by going it alone.
The buzz surrounding new technologies is always intense, leaving entrepreneurs to weigh whether to buy in or wait and see whether the promises of new tech come to fruition. Artificial intelligence and machine learning promise to be the next big trends in manufacturing, even as many companies struggle to integrate far less innovative trends. Manufacturing businesses must weigh the impact of technology adoption on their bottom line, then assess whether various new tech could improve valuations in advance of M&A.
The Technologies Changing Manufacturing Numerous new technologies promise to change manufacturing for the better, accelerating production, reducing liability, and over time reducing overhead. Some of the most promising include:
machine learning and artificial intelligence
ultra-fast 3D printing
big data analytics
light-based manufacture
virtual reality as a tool for building and testing complex prototypes
Is it Worth the Price? Particularly in a pandemic-ravaged world, cost-conscious entrepreneurs may be reluctant to adopt new technology—or at the very least, uncertain which new tech will actually deliver on the promised investment return.
Technological investments can offer a massive payoff over time, potentially reducing your overhead and steadily improving value. But this hinges on choosing the right technology for your company. The fact that something is popular and incredibly desirable does not mean it will be the right fit for your organization. Consider what you’re already doing, and how new tech might fit into—or expand upon—this. If getting value out of new tech hinges on creating a new product line or operation that you did not otherwise intend to initiate, the investment may not be worth it.
How Technology Adoption Can Affect Valuation Technology adoption improves valuation in three key ways:
Boosting revenue and reducing risk. New technologies can reduce your overall expenses, and potentially open up new streams of revenue.
Drumming up buyer interest. When you’re a successful first adopter, buyers may take note. The right technology can also earn you a reputation as an innovator, potentially making your business a more attractive target. Of course, the same innovation strategies that gain you attention also tend to be higher risk.
It offers valuable technology as an add-on for potential buyers. Buyers who want to gain access to your operations and technological resources may be more likely to invest if you already have high quality tech improvements up, running, and succeeding.
Getting Expert Input Valuation is tricky, especially amid a pandemic. Owners tend to overestimate the value of their company, and expect to get an immediate return on new tech investments. If you’re planning a sale or merger in the coming years and also weighing the potential value of technological improvements, it’s time to bring in a valuation expert. They can identify strengths and weaknesses of your current operation, assess strategies for cultivating value, and help with determining whether the right tech could breathe new life into your business.
About NuVescor Group 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.
Industry stats show that 75% of business broker transactions fail. By implementing the exclusive Rua Transaction Process we’ve been able to turn that statistic upside down with a success rate of over 80%. Whether you’re considering buying or selling a manufacturing business, put us to work for you and experience the NuVescor difference.
It’s no secret that COVID-19 has upended businesses across the globe, with 62% implementing serious cost containing measures in March 2020. Deal activity also slowed. By the second half of 2020, it was becoming clear which companies would benefit from the pandemic, and deal activity slightly increased, driven by access to capital via private equity.
As we head into the new year, the challenges and uncertainty most businesses experienced will remain a reality. Dealmaking faces serious disruptions on the planning and execution side, even as deal activity continues to recover. A number of key factors will help play a role in a manufacturing M&A resurgence:
Changing Political Realities The new administration may bring with it more regulations, higher income tax rates, and a shifting trade position. Government changes alongside COVID-19 spread could make for more volatile capital markets. This could be unfavorable to deals, but we don’t yet know exactly how things will play out.
Capital SPACs had a big year in 2020, which were a driving force for half of all IPOs. They have ensured development-stage companies get more rapid access to capital, allowing them to scale operations. This increase in SPAC activity will continue in the new year, especially in areas such as power storage and 3D printing.
New Innovation As companies seek opportunities to recover from the pandemic, they will likely invest more in digital factory and supply chain, sustainable technologies, and tech that allows them to work remotely. Supply chains took a huge hit. They must be come more adaptable. Investments in new technological capabilities could improve machine-based manufacturing, reducing the risk of disruptions like COVID-19 in the future.
Even before the pandemic, companies were interested in lowering supply chain costs and become more agile. COVID-19 has lit a fire under many, and companies that can adapt the fastest stand to gain the most.
An Ever-Shifting Industry With rolling shutdowns across the globe, travel and spending dropped, decimating many industries. Companies in individual leisure are poised for ongoing success even in the face of lockdowns, though manufacturing end markets such as aerospace and defense and automotive must evaluate options to improve or maintain their current positions.
As companies find a path out of the pandemic, M&A activity will grow thanks to emergency sources of capital, innovative investments, and a desire to scale operations to meet new demands. The unprecedented challenges of COVID-19 present real opportunities for growth for companies that can learn and grow.
About NuVescor Group 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.
Industry stats show that 75% of business broker transactions fail. By implementing the exclusive Rua Transaction Process we’ve been able to turn that statistic upside down with a success rate of over 80%. Whether you’re considering buying or selling a manufacturing business, put us to work for you and experience the NuVescor difference.
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