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.

Want to Improve M&A Deal Value? Focus on Optimizing Manufacturing

Want to Improve M&A Deal Value? Focus on Optimizing Manufacturing

Boosting manufacturing performance is one of the quickest ways to grow margins and release cash. Changing the structure and capabilities of your manufacturing supply chain via M&A offers significant value generation opportunities, but also requires a large upfront investment. Manufacturing typically contributes 30 to 50% of costs in a deal, so it’s important for both manufacturing and non-manufacturing companies to work to optimize manufacturing as early as possible.

Boost Productivity and Performance

Improving manufacturing performance increases gross margins and releases cash, offering far greater value than the short-term value generation of most transactions. Improvements must be sustainable, and rely on clear data—including real-time data.

Prioritize Business Continuity

The new entity must comply with all legal and regulatory requirements. Maintain consistent customer service by getting plant certification and other regulatory requirements in place as early as possible. Your transition plan should include transition service agreements and inventory building strategies to ensure supply chain continuity and minimize—or eliminate—customer service delays. Mergers can be disruptive; it’s your job to minimize disruption to your customers, and to ensure that the merger ultimately provides additional value.

Focus on Network Design Streamlining

Companies often cite plant rationalization as a key value driver. Companies can reduced fixed cost by an average of at least 25% thanks to network optimization. To define an optimal manufacturing network, companies must conduct a comprehensive review that focuses on proximity to suppliers and customers, then evaluates network options within the available constraints.

You must be willing to undertake a comprehensive review of your current operating practices, strategy, and critical expertise, as well as how they align with the deal’s goals.

Efficiently Manage Changes to Manufacturing Sites

Sometimes you need to close, integrate, or radically change manufacturing sites. Without a careful execution plan, doing so can disrupt operations and cause you to lose business. You can increase efficiency by moving products and equipment around before closing facilities. Executives need a keen understanding of product processes and capabilities, current and potential volumes, costs, labor, operational factors, and product mix. Identify the constraints within which you are working, then work early to develop a plan to minimize disruptions and reorganize plants in an orderly fashion.

Integrate Your Operating Model

Executives will need to reconfigure their operating models to become more integrated and collaborative. Operating considerations should begin at the corporate level, focusing on the degree of centralization, the extent of integration, and who fills which roles. There will be trade offs that may affect service and product quality. Be prepared to justify these trade offs, and ensure wherever possible you’re working to create more value and a better customer experience.

Post-Integration Manufacturing M&A Planning: Getting the Most from the Deal

Post-Integration Manufacturing M&A Planning: Getting the Most from the Deal

The world of manufacturing investment banking tends to focus on everything that comes before the deal: regulatory snafus, final sale price, and the challenges of inertia. But for most companies, success comes later. Post-merger integration is critical to the success of your business. Without ample planning, the deal may not realize its promised value, wasting time, effort, and talent. These five strategies can help you ensure that, when the deal closes, 1+1 doesn’t equal something less than 2.

Identify and Understand Value Drivers

All value creation opportunities should be explicitly stated early, with a plan for realizing success via each driver. It’s not enough to simply point to potential sources of value. You must have reliable metrics for determining how much these value drivers are worth, and how your business intends to drive that value higher. Particularly in the era of COVID and beyond, it becomes increasingly important to focus on contingency plans and adaptability to unforeseen crises.

Know the Importance of Governance Structure

Stark cultural and operational differences between two companies necessitate a new governance structure that helps expedite integration and reduce the risk of value dilution. Rather than merely creating functional teams, try defining value creation groups. A cross-functional approach here is key. This allows you to focus your attention on solutions for multiple functions. You must identify and begin assembling your governance structure early in the process, rather than turning governance into a mere afterthought.

Make a Diligence “Clean Room”

During the due diligence phase before closing, access to and availability of data can have lasting effects on the transaction. With too many delays, the deal may lose momentum. And if you cannot produce the data a buyer needs, they may begin to lose interest in the deal. A “clean room” can help you expedite the process. A clean room mans you rely on a third party vendor or specific individuals without conflicts of interest to share data between the parties. A clean room not only accelerates due diligence, but can also help with assessing future synergies and cost savings—a key consideration for integration planning.

Design a Detailed Operating Model for the Value Chain

You must have a deep and complete understanding of each company’s current people, systems, processes, and assets. This is the foundation upon which you will build the new entity, drawing upon the respective strengths of each prior entity. The future operating model depends on the type of deal and its goals. A small tuck-in may not require dramatic changes. A transformative deal, by contrast, presents the opportunity to implement sweeping reforms that increase value.

Focus on Culture

It’s the hidden aspect of every deal, and the one that’s most likely to send the deal awry: culture. Changes in corporate demographics, management style, requirements, benefits, and more can be real challenges for your workforce—who will in turn create serious challenges for you. The hidden, unstated aspects of the deal—who holds the power, who makes decisions, how employees are treated—are often the most important. So be explicit about differences, and find ways to bridge these gaps.

Key Manufacturing M&A Trends

Key Manufacturing M&A Trends

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.