Global manufacturers are facing a range of pressures: a supply chain shortage, recovering from the pandemic, an uncertain post-pandemic future, and increased competition for limited resources. This combination of challenges has strongly affected how global manufacturers think about M&A.
So what specific factors are coloring perceptions as we move into 2022 and, hopefully, into a new wave of fewer pandemic-related considerations? These issues figure prominently:
Ecosystem changes. As a result, many businesses are looking to partner with others to create new ecosystem solutions.
Business resilience. Manufacturing executives considering an acquisition are increasingly measuring the target company’s resilience when assessing value and weighing whether to invest.
Bolt-on acquisitions. These are becomingmore popular options, allowing two companies in the same sector to decrease competition and increase market share. Transformative deals are becoming less popular, and purchases in adjacent sectors have dramatically decreased.
Geopolitics and international strategy. Government policies are increasing domestic production to boost national competitiveness. These regulations color perceptions of global M&A. Some companies are focusing more on domestic transactions, while others are looking only to international transactions where the regulatory environment is favorable.
Major strategic drivers. Our clients consistently report to us that regulations, trade changes, supply chain issues, and tariffs continue to color M&A decisions. The United States remains a popular destination for international manufacturing acquirers, who hope to be closer to customers. India is a close second. Manufacturers intend to expand their reach to Europe and Asia in the next few years, especially if the regulatory environment and pandemic-related disruptions move in the right direction.
In 2022, we anticipate M&A will move in two distinct directions. For some manufacturers, supply chain disruptions and the ongoing effects of the pandemic will temper any M&A ambitions. For others, M&A will provide a path out of prior disruptions. Overall, we anticipate an M&A rebound, and believe that businesses which are well-prepared for these transactions can still gain immense benefits from them.
As the supply chain tightens, manufacturing companies are in increased demand, especially those that have found a way to work around supply chain shortages and the global uncertainty wrought by the COVID-19 pandemic. If you’re considering folding a second or third business into your own, or investing in a new manufacturing company for the first time, asking the right questions can ensure you make the most of the deal, while minimizing risk. Ask these questions before buying a manufacturing business.
How has this company performed during COVID?
COVID put every company to the test, especially manufacturing businesses. It’s expected that some companies would see a downturn during the pandemic. Nevertheless, how the business handled the pandemic reveals much about their ability to think creatively and flexibly. Did the company find ways to protect its staff and clients? Or did it cling to the ways o the past, unable to see another way of doing things? Did it generate new business, develop new technologies, and make the most of a challenging economic environment? Or did it just keep waiting for COVID to go away, denying the reality of the situation?
What is the future of this manufacturing sector?
No matter how strong an individual company appears, it’s important to look at the larger niche in which it operates. Is the niche growing? Or are you investing in a sector that may eventually cease to exist thanks to changing technology, shifting mores, and automation?
What is the long-term strategy here?
How is this company planning to compete in a 21st century economy, and what can you do to make it even more competitive? Good investments have good strategies. Bad investments keep doing things the way they have always been done, and hope for the best. You should have a clear vision for the future of the company, and that vision should be firmly rooted in past performance and evidence-based forecasts.
Is the company financially healthy?
Sometimes it’s a good idea to buy a struggling company and then grow it into something better, but only if you have specific experience doing so and a strong plan for getting the company back on track. In most cases, these struggling companies are money pits. You need to ensure the business is financially healthy. This means taking a long hard look at financial statements, conducting due diligence, and evaluating any potential liabilities, including possible lawsuits. Look also at financial forecasts, which may help you thoughtfully assess where the company may be in a few years.
What will I do differently as owner?
Ideally, prospective owners should have a plan for what they intend to do differently—and better—to promote greater profitability and growth. If you can’t identify specific changes you intend to make in the company’s operations, then you should not expect it to grow. And if you’re not clear about the overall operational picture of the company, it’s critical to get these details before even considering making an investment.
Acquisitions have always been a viable strategy for manufacturing and supply chain companies to grow. In Q1 of 2021 alone, there were $36 billion dollars in deal value, compared to $17 billion in the same quarter the prior year. M&A investments are again happening, but it doesn’t mean that they’re right for everyone, nor that any specific M&A undertaking is right for your company. These four questions can help.
What is your company all about?
This is surprisingly difficult for many enterprises to answer. Before you can move forward with a deal, though, you need to know what your company’s core competencies are, what you bring to the table. Consider your corporate culture. What sets it apart and makes it unique? What might make it better? What sorts of companies would yours blend best with?
What are your goals?
Growth is not a goal unto itself. There must be a specific reason you hope to grow, and a specific direction you want the growth to go. In many cases, businesses have a number of small reasons for engaging in M&A. This can nurture indecision and uncertainty. It’s typically better to have one or two clear, compelling reasons that justify the merger. Most acquisitions cannot address multiple needs. Forcing them to try to do so is a recipe for rapid failure.
Do you have the right team?
A merger should never be a DIY undertaking. You need to identify what you don’t know, then hire experts to fill in those knowledge gaps. An acquisition should be a collaborative, team undertaking that relies heavily on the wisdom of lawyers, investment bankers, accountants, and other industry experts. Build a strong team and the other side will be less likely to take advantage of you during the negotiation process.
How do you intend to contact companies on the market?
The way you approach a potential acquisition target can color their opinion of you. Moreover, not every company available for sale is listed on the market. Some may list with brokers, but others are discreet. Still others may be willing to sell if approached with a great offer. Be prepared to undertake a structured process to search for available businesses. Working with a good broker is key here.
There’s no one size fits all strategy for assessing every potential M&A target or buyer. It’s part art, part science, and requires quite a bit of wisdom to get right. This is why it’s so critical to work with a skilled, experienced deal team who has experience in your specific niche.
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