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.
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.
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